Xavier Rolet, CEO of the London Stock Exchange (LSE), is hoping that the European Commissions review of MiFID will both level the playing field across Europe’s trading venues and foster an environment of greater efficiency and lower costs for all.
Rolet’s organisation is facing mounting competition from multilateral trading facilities (MTFs). The LSE now accounts for between 55% and 60% of trading in the UK’s FTSE 100 large-cap index, having had its market share eroded by the likes of Chi-X Europe, BATS Europe and Nasdaq OMX Europe.
These new venues’ maker-taker pricing schemes typically result in net fees of 0.1 basis points per trade, which has both won them market share and forced their rivals to lower their transaction fees to keep pace.
However, Rolet pointed out in his presentation at TradeTech on Wednesday that exchanges handle more order flow and perform more functions than their smaller, nimbler rivals, but must do so while charging comparably low fees.
“Clearly exchanges have the advantage of incumbency and we recognise that. But it is also very clear that a number of the functions we provide require time, investment and human resource,” says Rolet. “Part of the task of the MiFID review will be to put all these aspects together – microstructure, cost of operation, quality of products – and ensure that a competitive level playing field is defined.”
Rolet also hopes that the MiFID review will lead to the removal of a number of barriers that are holding back the development of the European trading markets. He pointed out that once turnover velocity, depending on whether dark, lit or aggregated order flow, is taken into account, it amounts to between one-third and one-fifth of that in the US. Overall volumes are between one-seventh and one-tenth of US levels. “Europe remains today a fairly anaemic market in terms of secondary market liquidity,” he observed.
One area in particular that is restricting European equity market development is the fragmented post-trade environment. Unlike in the US, where there is a single central counterparty (CCP) and central securities depository, Europe has several of each, and two new clearers – European Multilateral Clearing Facility and EuroCCP – have been set up to serve the new crop of MTFs that have emerged since MiFID.
Rolet says that to solve this, a framework for post-trade interoperability needs to be developed. According to LSE estimates, post-trade processes account for as much as 50% of the total cost of operating in the European cash equity markets.
“We are confident that post this review, a framework will be laid for a much more efficient and much more interoperable European environment,” he says.
The LSE is not simply waiting for the regulators to help improve the competitive landscape. Last year it bought Sri-Lankan technology firm MillenniumIT, and will migrate to the firm’s Millennium Exchange matching engine technology from its current TradElect system later this year.
And, despite the comments of Instinet Europe CEO Richard Balarkas earlier in the day that exchanges had yet to engage in pan-European competition, the LSE completed the acquisition of a majority stake pan-European MTF Turquoise, which it co-owns with 12 of the biggest investment banks – also the LSE’s biggest clients.
“Besides realignment with our client base, this is also an opportunity to take competition to other exchanges in Europe and perhaps even beyond European borders,” says Rolet. He adds, “We are confident that as our new technology comes on-stream and the positive impact of a number of initiatives we have taken and will continue to take come through, our competitive position will improve.”
However, while a proponent of competition in the European market, given the efficiencies it can bring, Rolet believes that there will be casualties from the price wars that have broken out since the MTFs launched. Referring to the number of entities competing in the Western European cash equities space, coupled with the slim 0.10 basis-point-per-trade margins, Rolet says, “Fee income relative to lit book execution will not enable all the existing entities, exchange or MTF, to survive in their current form. This is also a subject for regulators. As they look forward they are already starting to consider how these particular venues are going to evolve, how they are competing with one another and how they could potentially consolidate.”