Next year will see full post-trade interoperability between Nordic stock exchanges but clearing choice will be of marginal benefit until more buy-side traders in the region adapt to Europe’s fragmented equity landscape.
At the end of October, Nordic-focused multilateral trading facility (MTF) Burgundy announced that it would offer clearing choice from May 2012 between its existing central counterparty (CCP) EMCF and SIX x-clear.
Burgundy will join fellow MTFs Chi-X Europe, BATS Europe and Turquoise as well as Nasdaq OMX Nordic, the operator of domestic markets in Denmark, Finland and Sweden, all of which already, or plan to, offer alternative clearing providers.
However, Nordic market participants are still counting their savings from the introduction of EMCF as a CCP for trades executed on Nasdaq OMX Nordic in November 2009.
“The introduction of a CCP in the Nordic region was a huge step in the right direction and took clearing fees down from around €0.75 per trade to a negligible level,” Jens Jacob Foged, head of trading at Danish asset management firm SparInvest, told theTRADEnews.com. “Some of our trades do take place on MTFs, but like many Nordic buy-side firms, we do not keep track of the amount of trading done away from the main exchange.”
Prior to the introduction of EMCF, Danish market participants had to clear trades through VP, a privately-owned post-trade utility which did not offer netting capabilities, meaning each trade had to be cleared on a per-ticket basis, regardless of the net exposure of a stock at the end of each trading day. Swedish and Finnish markets cleared on a bilateral basis prior to EMCF’s introduction.
Although liquidity has not fragmented in the Nordics to the same degree as markets in the UK, France and Germany, MTFs have made their mark in the region.
According to figures from Thomson Reuters Equity Market Share Reporter, Nasdaq OMX Nordic accounted for 58% of Swedish blue chips in October, 76% of Danish large caps and 70% of major Finnish stocks, with the remainder shared between Chi-X Europe, BATS Europe, Burgundy and Turquoise.
But without visibility on where their orders are directed, Nordic investment managers will be unaware of how much their brokers are saving in exchange and clearing fees through interoperability arrangements. By using a single clearer for the stocks traded across multiple execution venues, market participants can net their clearing flows, thereby reducing post-trade costs.
Chipping away
While he agrees that the benefits of alternative trading venues are not fully understood by market participants in northern Europe, Olof Neiglick, CEO of Burgundy believes fragmentation, particularly in Denmark and Norway, will begin to pick up next year.
“Local brokers in Norway and Denmark still conduct the majority of their trading on the primary exchange and need to be educated further on the benefits of using MTFs,” says Neiglick. “However, we are being asked more questions from the buy-side on the quality of our market, and in the last six months, buy-side traders are asking for more information on how their orders are routed.”
Burgundy is currently involved in a number of initiatives designed to increase the visibility of alternative trading venues in the Nordic region. This includes a project with the Swedish retail broking association that began in August which gives the retail community a consolidated overview of where trading took place.
Furthermore, Burgundy has established partnerships with Nordic corporate issuers that will result in the inclusion of fragmentation statistics provided by trading technology vendor Fidessa in the annual reports of many blue chip firms.
The projects could be bolstered by MiFID II proposal’s that may compel brokers to publicly disclose their top five execution venues on an annual basis. In addition, the establishment of a standardised pan-European consolidated tape could also provide greater visibility on where trades are executed.
In the meantime, Neiglick asserts that interoperability for Nordic stocks will be targeted at London-based clients.
“Interoperability will mainly satisfy our London-based members and will put us on a par with the direction in which the pan-European market is going,” he said.