Falling equity trading volumes are threatening the business models of stock exchanges, multilateral trading facilities (MTFs) and dark pools. They have seen their market shrink in size and a number are now considering the possibility of merging. Could this be the final act of the first generation of MTFs?
After some volatility earlier in the year, August 2010 saw the volume of shares traded across Europe fall to €668 billion by turnover, a perhaps predictable 12-month low.
Reasons given for the current levels stretch from August being a holiday period to everyone going long to an expectation of global economic collapse. That will be of little comfort to the businesses that thrive on volume of trading. But the reality is that with the exception of the year-end for 2009, volumes had been rising since December 2008, the deep midwinter after the house of Lehman fell.
The repositioning of liquidity in Europe over the last three years has for the most part been a shift of business from the incumbent markets to MTF Chi-X Europe. Other MTFs, with the possible exception of BATS Europe, have not realised their ambitions to capture moderate chunks of market turnover.
MTFs Euro Millennium and Turquoise were married off to exchange groups NYSE Euronext and London Stock Exchange respectively, while exchange firm Nasdaq OMX's MTF NEURO was shut down on 1 July 2010.
Further consolidation is on the cards now an anonymous suitor has made an enquiry to Chi-X Europe. BATS Europe and Nasdaq OMX are both rumoured to be the potential bidder.
Of the first generation of MTFs, only BATS Europe and Chi-X Europe can claim to have had any real momentum. Over the last six months both have featured in the top five European trading venues as measured by volume of shares traded. Turquoise regularly processes more than 3% of European shares by volume which puts it in the bottom end of the top ten venues, while all other MTFs combined process less than 1%.
The model that MTFs use – low-cost venues, algo-friendly, cheaper, quicker trading – was first seen in the US employed by ECNs. During the last decade, ECNs grew rapidly but this was followed by consolidation with incumbent exchanges, only to be replaced by newer, cheaper alternatives.
If Chi-X Europe was bought up by an incumbent exchange or alternatively by another MTF, a similar cycle could start in Europe. But Europe is different to the US in two important ways. Firstly volumes are lower. While the US has seen an average monthly market turnover of US$4.5-7 trillion in 2010, Europe has seen between $1-2 trillion. That gives less of a market to take a slice of. Secondly, the trade-through rule in the US means that trades get passed to the venue that can match an order at the lowest price. In Europe a broker decides where trades occur and venues are often selected on the basis of previous success at executing trades. Combined, the barriers to entry in Europe are greater.
However there is space to grow in Europe. The announcement that Spain is to have a new MTF, the Plataforma Alternativa De Valores EspaÃ±oles (PAVE) is a sign that the continent is maturing in its bid to create competition in trading. Equally, Italy does not have a serious challenger to the incumbent Borsa Italiana, owned by the London Stock Exchange. Quote MTF is another new kid on the block, domiciled in Hungary, yet to make its mark.
As the likelihood of further consolidation of the first generation of MTFs increases, the second generation (perhaps Generation Y-not) is emerging.
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