Consolidation between multilateral trading facilities (MTFs) in Europe will intensify if trading volumes in the region continue to dwindle, according to research from consultancy Aite Group.
The firm's latest impact note, titled ”European execution venues: the good, the bad, and the ugly', looks at how liquidity has fragmented in Europe to date and considers the factors that have so far hampered the growth of alternative venues in Europe, primary among them the ongoing slump in trading activity following the financial crisis.
“MTFs' business models and likelihood of success were based upon a larger pool of liquidity within Europe than exists today,” wrote Simmy Grewal, analyst at Aite and author of the report. “As there now is a smaller pie, venues need a larger slice to survive, let alone be profitable.”
The study notes that European activity almost halved from an average daily volume of €59 billion in 2007 to just over €30 billion in 2009. In contrast, the US has witnessed a continued increase, with just under 10 million shares traded daily in 2009, compared to just over six million in 2007.
As well as the impact of the financial crisis, the study argues that the loss of liquidity in Europe could be attributed in part to the negative consequences of MiFID, some of which are being addressed in the European Commission's review of the directive, which is expected to conclude with a proposal in Q1 2001.
MiFID's teething troubles include the fragmentation of liquidity to multiple execution venues, the lack of a standardised consolidated source of post-trade data to help determine where liquidity is fragmenting to and the absence of a harmonised clearing and settlement regime. The Aite report also calls for a more consistent application of MiFID across all member states, citing the lack of adoption in Spain as a barrier to achieving a truly efficient European marketplace.
These problems may have also discouraged overseas trading firms from the US and Asia looking to expand their presence in Europe, which would have also contributed to the stagnation of European trading activity.
“If liquidity does not return to pre-2008 levels, we can expect to see further consolidation in the MTF space,” added Grewal.