Any consolidation among Europe’s multilateral trading facilities (MTFs) will find few parallels with the acquisition of US ECNs by exchange groups in the mid-2000s, according to Larry Tabb, founder and CEO of research consultancy TABB Group.
Two pan-European MTFs – consortium-backed Turquoise and Euro Millennium, owned by recently-acquired technology provider NYFIX – are currently looking for buyers, but Tabb suggests that established European exchange groups might not be first in the queue.
“Consolidation in the US was a trading platform issue as well as market share issue,” said Tabb. “NYSE did not have a platform that could compete with Archipelago, so they bought it. When Nasdaq bought INET, they bought a better platform and market share.”
Europe’s leading exchange groups – Deutsche Börse, London Stock Exchange Group, Nasdaq OMX and NYSE Euronext – all have sufficiently strong technology platforms not to want to buy purely to secure a new trading platform, Tabb asserted.
In December 2005, the then member-owned New York Stock Exchange voted to acquire Chicago-based electronic trading venue Archipelago. Days later, Nasdaq completed the acquisition of the INET ECN from agency broker Instinet.
Turquoise, the MTF launched by nine global investment banks in September 2008, appointed stakeholder UBS to find a potential buyer last month. On 27 August, NYSE Euronext confirmed that the acquisition by its subsidiary, NYSE Technologies, of NYFIX, a US-based connectivity-to-transactions technology provider, left the exchange group considering external partners among the strategic options for NYFIX’s dark pools, Millennium, a US-based venue, and Euro Millennium.
The art of M&A is a relatively new one for stock exchanges to master and Tabb believes that Europe’s exchange groups may draw another reason for caution from the experience of NYSE and Nasdaq in purchasing domestic rivals.
“Consolidation is good from a cost standpoint, but bad from a revenue standpoint,” said Tabb. “If you consolidate two platforms you don’t get twice as much volume on one platform, you get maybe 1.5 times the volume. To that extent, you’re better off running multiple market models so that there is an arbitrage between markets that increases volumes rather than decreases it.”
However, the MTFs will not be short of suitors. Tabb believes that a buyer could come from three potential sources: an existing player that needs more penetration; an outside entity that wants to establish a London presence; or local exchange that does not have a London-based MTF.
Of the largest four equity exchange groups in the US, only Direct Edge has not yet launched a London-based MTF. In January, CEO William O’Brien told theTRADEnews.com that the firm would only consider overseas opportunities where the firm could differentiate itself from the competition. “We are not going to look to engage in new areas where we are a me-too player,” he said.
With a 4.66% share of pan-European order book trades, according to the latest weekly analysis from the Fidessa Fragmentation Index, Turquoise controls the second-largest market share of any MTF behind Chi-X and just ahead of BATS Europe. Tabb suggests that a change of ownership could provide the necessary stimulus to make Turquoise a profitable business in the longer term.
“The main goal of Turquoise was to put pressure on the local exchanges to reduce prices, increase speed and offer more flexible terms. To that extent, it has been successful,” said Tabb. “But consortium ownership is not the most efficient operating infrastructure. By selling Turquoise off, it becomes possible to bring a set of more focused management talent in to change the business model and get Turquoise running more profitably and gaining more market share.”
In the US, consolidation marked a slowdown in the pace of innovation in the view of many market participants. The sale of INET to Nasdaq led directly to 13 traders leaving Kansas City-based proprietary trading firm Tradebot to form BATS Trading. But Tabb is optimistic that changes in ownership among Europe’s MTFs will not put a brake on the pace of change in Europe’s equity trading markets.
“New players are coming into the market, new trading strategies are being developed and enhancements are being made to market structures,” he said. “But what may change is where innovation comes from. Some of the broker-dealers may not have the budgets that they once had, so you might see the high-frequency guys beginning to drive change.”
If the US is showing a lead to Europe, it may be in the field of regulation. In recent months, the US Securities and Exchanges Commission has voiced its concerns on use of ‘flash’ orders and the post-trade reporting practices of dark pools. The European Commission will complete its review of the impact of MiFID in 2010. The Committee of European Securities Regulators, the body charged with ensuring consistent securities regulation across Europe, is conducting ongoing consultations on the use of pre-trade transparency waivers by European dark pools.
“I think we will see more investigations into the appropriate market structures and order types and how should the markets work in a more open access way,” said Tabb.