There is not enough trading volume to sustain Europe’s new execution venues, according to Frederic Ponzo, managing director of financial technology consultancy NET2S.
A new report by NET2S, ‘One year into MiFID: Solutions for Fragmented Liquidity’, predicts that not all the five venues profiled – Chi-X, Turquoise, BATS Europe, Nasdaq OMX Europe and Equiduct – will survive 2009.
“I am pretty convinced there won’t be enough liquidity shifted from the traditional exchanges to ensure enough revenue for all of them,” Ponzo told theTRADEnews.com. He estimated that a multilateral trading facility (MTF) could expect to break even if it could capture between 5% and 6% of primary exchange market share. “So far, less than 10% has moved away from the London Stock Exchange, for example,” he said. “It is a bold assumption to think that 30% of the volume will move away from the LSE to MTFs, and that would just allow them to break even.”
Ponzo thinks Chi-X and Turquoise are most likely to survive. “Chi-X is already sustainable. It would take a really big disruption for it to go under,” he said. “With Turquoise, there is enough at stake for the investment banks supporting it to ensure that it does not fail.”
Ponzo expects at least one, but a maximum of two, of the remaining three contenders to survive. They are all taking different approaches. BATS is offering low execution costs and sub-millisecond latency, and its parent has a track record of grabbing market share from Nasdaq and the New York Stock Exchange in the US. In addition to its sub-millisecond trading system and the backing of its parent, Nasdaq OMX Europe is providing onward routing to other European venues. Equiduct has a variety of features, including a choice of clearing providers and its PartnerEx bilateral trading service.
The NET2S report said that because MTF pricing and speed has largely converged, the new venues will be competing on functionality. But Ponzo said that while additional services will attract mid-tier brokers, larger sell-side firms will focus in process efficiency. “I’m expecting that the battle for the large institutional orders will be a little bit less driven by functionality than the mid-tier segments,” he said. “The larger brokers will look at optimisation rather than richer functionality.”