Market participants can expect to see trading venue consolidation and shorter broker lists should trading volumes remain depressed for the remainder of 2010, according to the September poll on theTRADEnews.com.
Both outcomes garnered 44% of readers' votes, while only 13% asserted that commission rates would go up as a consequence of a prolonged dip in trading volumes.
The findings of the survey follow a broad downward trend in asset values and trading volumes globally since equity market turnover peaked in April and May 2010. However, turnover in Europe for September stands at €755 billion, a slight recovery from the previous month's €668.6 billion, but still considerably less than the peak of €1,108 billion reached in May, following the Greek debt crisis. A slightly different picture exists in Asia, where volumes for September stand at US$1,460.8 billion, down from US$1,464 billion in August. Although higher than the US$1,341 billion traded in May, current volumes in the Asian market are down since their peak in April, when they stood at US$1,631 billion, according to data from Thomson Reuters.
Nevertheless, the depressed outlook for trading volumes this year has already prompted consolidation in the European marketplace with the closure of exchange-owned multilateral trading facility (MTF) Nasdaq OMX Europe on 1 July 2010, which itself followed the purchase of MTF Turquoise by the London Stock Exchange (LSE), completed on February 2010, and the amalgamation of dark MTF Euro Millennium by NYSE Euronext into its SmartPool facility in December 2009. The current excitement over a potential bid for Chi-X Europe, which is rumoured to have come from fellow MTF BATS, only confirms the trend of consolidation in the region's markets. Chi-X accounted for 17.2% of pan-European equity trading in August 2010.
“The number of venues that exist at this point is not sustainable,” said Ashok Krishnan, head of EMEA execution services and sales at broker Bank of America Merrill Lynch (BAML). “A certain level of market share is needed to survive, and clearly there is only a finite amount to go round.”
Some market observers have likened Europe to the US, where electronic communications networks, firms which challenged incumbent exchanges in a similar fashion to European MTFs, first blossomed then went through a period of consolidation with established players, before being replaced by a new generation of leaner, meaner competitors. New entrants like Quote MTF, which claims to be the first of the new generation of MTFs, assert that they can undercut their older rivals, turning a profit with a fraction of the market share achieved by first movers. The recent arrival of new Spanish MTF, PAVE, would appear to confirm the opportunities available to a new generation despite today's arid climate.
However, not everyone expects this outcome. “I think you will find the cost of entry has risen quite substantially,” said Tony Whalley, investment director at Scottish Widows Investment Partnership. “Anyone who wants to come in can, but it appears that the current participants have taken a massive market share from the LSE and other European exchanges, and are in a very strong position.”
Instead, Whalley sees the larger exchange groups as the main casualties of the ongoing decline in global equity trading volumes. “With MiFID II on the horizon, we can expect a consolidated tape and changes to data pricing. Some exchanges are charging the same for their data as when they had 100% market share. Chi-X, BATS, etc are not charging at all for their data. Once you get consolidation, the MTFs are going to be able to pick up in terms of profitability and the big boys are going to suffer,” he says.
The other side of the coin is that, as volumes decrease, buy-side firms may have to reduce the number of brokers they use. Times are tough and a consolidation around core partners may be the only answer. “There is no question that with current volumes, a number of brokerage houses are not viable,” said Whalley. “When volumes dry up as they have done recently, it will be the medium-sized firms who are hurt first.”
BAML's Krishnan agrees that rationalisation of relationships seems inevitable. “With lower volumes, the only way you can maintain your level of services is by ensuring you don’t spread your wallet too thinly,” he said. “Ultimately, that may lead to a shortening of the broker list.”
So who will survive the drought? Whalley thinks the future lies with smaller, leaner firms who can operate on leaner pickings. “Some of the smaller ones will be able to survive, because they will be able to pay for research under a commission sharing agreement (CSA). The medium ones rely on some combination of CSA and order flow, and they are the ones I think who are going to find it a lot more difficult,” he said.