Consolidation of Europe’s multilateral trading facilities (MTFs) is “inevitable” despite predictions by research consultancy Aite Group that they will account for half of European share trading “within the next four to five years”.
Aite suggests MTF consolidation will begin to take place in the next two to three years, resulting in three to four large venues that account for around 40% of European trading volume.
In a new report, ‘European multilateral trading facilities: The post-MiFID exchange landscape’, Aite senior analyst Phillip Silitschanu asserts that MTFs will capture 20% of European equity orders by the end of the year, and expects the new trading venues to achieve an “even split” with incumbent exchanges by 2013. In the first four months of 2009, MTFs accumulated a 15% share of European equity trading.
The report suggests that smaller and late-coming competitors in the MTF space may struggle survive in harsher conditions in the financial markets than might have been anticipated 12-18 months ago. The report points out that the business models of many MTFs, which rely heavily on charging low fees to attract high volumes, were beginning to “sputter” due to the recent fall in volumes across all European trading venues.
“Unless markets rebound in the next six to 12 months, some of the smaller, less-well-established MTFs will have a hard time surviving in the long-term,” the report said. “MTFs which just last summer looked poised to put up a good fight against established exchanges are now struggling to hold onto the market share they have gained. There is rampant speculation as to which MTFs will merge and which will be left standing once the world emerges from its current market dark age.”
Liquidity is considered to be the most critical asset for MTFs hoping to build sustainable businesses in Europe. The Aite report notes that their acknowledged advantages over traditional exchanges, such as faster speed and keener pricing, are offset by a lack of the “breadth and depth of securities” required by large institutions. “With declining trade sizes on the major exchanges and a growing need for venues to offer electronic access, we believe venues that are able to offer deeper liquidity, along with lower costs, will be the successful ones, but increasing competition is the main factor that will prompt exchanges or MTFs to merge in the coming years,” the report said.
Despite predictions of an increased total market share for MTFs, Aite states that the absence of a coordinated equity market infrastructure in Europe, including a consolidated price feed and full clearing and settlement interoperability, would limit the growth of electronic trading overall in Europe. Moreover, “increased regulatory scrutiny may impact the ability of MTFs to introduce innovation into trading European equities to the detriment of institutional investors,” the report added.
The report includes profiles of 11 MTFs including longstanding crossing networks such as Liquidnet and ITG POSIT, dark pools like NYFIX Euro Millennium and recently-launched exchange-backed initiatives.