Exchanges that embrace competition will survive

Although exchanges will have to change their competitive mind-set to hold on to liquidity, Lee Hodgkinson, CEO, SWX Europe, feels that the demise of the exchange has been greatly exaggerated. As long as exchanges embrace the changing landscape and do not fear it, Hodgkinson believes they will be in a good position to compete with MTFs.
By None

Although exchanges will have to change their competitive mind-set to hold on to liquidity, Lee Hodgkinson, CEO, SWX Europe, feels that the demise of the exchange has been greatly exaggerated. As long as exchanges embrace the changing landscape and do not fear it, Hodgkinson believes they will be in a good position to compete with MTFs.

SWX Europe – formerly known as virt-x - is a subsidiary of Swiss Financial Market Services and was initially set up in 2001 as a trading venue for pan-European blue chip securities. It is registered as a regulated investment exchange under MiFID and has amassed €534,579,000 in trading turnover since January, with the majority of its volume in Swiss blue chips.

“Competition and cost pressure are coming, and something that we are thinking carefully about, but the exchanges are well placed to prosper in the future if they continue to evolve,” he says. “We are on the cusp of dramatic and long lasting change. This is to be embraced, not feared.”

To this end, SWX Europe is currently in the middle of a four-phase technology upgrade launched last July designed to increase latency and capacity ten-fold. Prices have also been reduced by 22% since April, with further reductions in the pipeline.

In addition, it has also launched a joint dark pool venture with electronic trading solutions provider NYFIX, called SWX Swiss Block. “It will be SWX Europe blue chips in the first instance, with the opportunity for us to expand to mid- and small-cap Swiss stocks where getting large executions done can be more of a challenge.” said Hodgkinson

As pan-European venues dominate the headlines, regionally focused platforms remain a relatively untapped niche. Although offering pan-European services, SWX Europe has inclined towards trading Swiss blue chip stocks. For the first six months of this year, trading in European blue chip equities has accounted for just 1.4% of its total turnover.

“We excel in the provision of liquidity services for Swiss blue chips,” says Hodgkinson. “We understand the issuers, the trading community and the investment community, and we believe that liquidity services in these stocks can be our unique value proposition.”

Burgundy, an Nordic MTF set up by a consortium of Swedish brokers, is the only other platform focusing on regional stocks. According to Hodgkinson, the growing popularity of pan-European services has left a void for these niche specialists to fill.

“There may be room for more niche markets, but you have to make the trade offs and choices that give the ability to focus on, and excel at what you do,” he says. “There are opportunities to expand our service boundaries, but we will only pursue those in the market and service segments where we feel we can add distinct value for customers.”

From August, Swiss blue chip stocks will also be available for trading on pan-European MTF Turquoise, and are already available on Chi-X, but Hodgkinson believes that investors will look to SWX Europe first, “We currently have a dominant market position. We bring together a huge range of Swiss buyers and sellers and the spreads on our market are extremely small. Our pricing is also amongst the cheapest in the industry and when our technology is delivered, it will meet customers’ latency and capacity needs,” he says. “However, we do not see our position as a divine right and know we have to work hard to retain it.”

While the imminent battle for fragmented European liquidity is often seen as pitching MTFs against exchanges, Hodgkinson says MTFs must first address competition between themselves, arguing that too strong a focus on high frequency and stat-arb trading may be short-sighted, “At the moment, there is a grave danger for those new entrants that aren’t sufficiently dissimilar to the others,” he comments. “You can’t have five or six entrants all succeeding in the same specialist arena. There seems to be an element of me-too around these strategies. Me-too might be okay, but me-three and me-four might struggle.”

«