A recent decline in European equity trading volumes has coincided with an onslaught of statistics and performance tables asserting the merits of trading on various venues.
Credit Suisse AES estimates that trading activity fell 62%
by value in January and February across Europe against the same period in 2008. Expectations of low trading volumes throughout 2009, prompted by declines in trading activity by proprietary trading desks and hedge funds as well as higher redemption levels for many institutional investors, have increased speculation about consolidation among Europe’s exchanges and multilateral trading facilities (MTFs).
A number of the reports issued in recent months have claimed that alternative liquidity venues are offering more competitive pricing and cheaper trading fees than exchanges. But measurements are not easily comparable and findings frequently conflict.
In February, research consultancy TowerGroup published a study claiming that pan-European multilateral trading facility Chi-X’s transaction costs were a tenth of fees charged by European exchange groups. The study, commissioned by Chi-X, compared the venue’s explicit and implicit trading costs with those of the London Stock Exchange (LSE), NYSE Euronext and Deutsche Börse in both high- and low-volume scenarios from October 2006 to October 2008.
In March, the LSE retaliated with an analysis of the spreads available on Chi-X and Turquoise in FTSE 100 securities during November, December and January. The LSE’s figures indicated that the exchange had offered the tightest bid and offer spread of the three venues 84.2% of the time during January, an improvement from 75.9% in November.
Marcus Hooper, executive director, Europe for crossing network Pipeline, and a former buy-side trader, suggested narrow spreads may not always be attractive. “Most buy-side traders often prefer to be trading on the passive side, in which case the bigger the spread the better,” he said.
The buy-side is likely to take competing claims by venues with a pinch of salt, according to Richard Phillipson, principal, investment practice at Investit, the investment management consultancy. “One of the first lines of scepticism will be: ‘Yes, and in what size was that?’,” he said. Phillipson also suggested that prevailing pressures to “simply to get the trade done” meant that some buy-side firms were entering into agreements with their brokers to hit a price based on a consolidated European best bid and offer that draws on prices from multiple venues.
Agency broker Instinet Europe weighed in on the side of the alternative venues, claiming that it achieved an average of 5.72 basis points of price improvement for clients in Q4 2008 by routing around a third of trades away from the primary exchange.
Instinet Europe said it routed nearly 28% of its European equity trades away from primary exchanges by value traded during the quarter. Over the same period, the firm executed 35.42% of its trades in French, German, Dutch and UK stocks on MTFs. Price improvement is generally defined as the difference between execution price and the best quoted price on the primary exchange at a given time. Instinet Europe data is based only on executions that remove liquidity from MTFs over the period in question.
Michael Sparkes, director and managing consultant of analytical products and research for ITG in Europe, confirmed that access to liquidity remained the main focus for institutional investors. “The buy-side generally still does not capture execution data that drills down to the venue specific level,” he said. “Particularly in the current environment, the buy-side expects brokers to provide access to liquidity – whether that means four venues or forty – but some are looking increasingly closely at which venues and which trading tools are most appropriate for specific trading strategies.”
In addition, Equiduct Trading, a pan-European equity trading venue, has launched a suite of analytical tools which claim to demonstrate that a high proportion of trades sent to incumbent exchanges are not being executed at the best price available.
Equiduct asserted 25.7% of trades executed on the LSE in January could have been conducted at a better price on an alternative venue, based on an analysis by its Orange Liquidity Fragmentation Analytics, a post-trade analytics tool designed to locate the best price for the 500 most traded stocks in Europe across seven trading venues.
ITG’s Sparkes said that brokers are more likely to make detailed comparisons between exchanges than buy-side traders. “Brokers are looking to use new venues where they feel it can give them an edge. The new entrants’ rising volumes show they can be competitive in certain circumstances,” he said.