A work in progress, a job still not yet done, liquidity is an issue, or cracks beginning to emerge. All of these statements could accurately sum up the current state of Europe’s fragmented equity trading venues, though some vendors are holding on to the view that it is a short-term blip in the market, rather than deep-rooted structural problems, which is the cause of so many sleepless nights of late.
The scramble for liquidity has been at times overwhelming for what have been generally underwhelming trade flows, both within the established trading platforms and particularly the new crop of alternative venues – or multilateral trading facilities (MTF) – that have emerged post-MiFID. Comments from the heads of NYSE Euronext, the London Stock Exchange (LSE), Nasdaq OMX Europe and Turquoise back this up.
With 54 per cent of delegates at TradeTech, the European gathering for trading professionals, believing that the objectives of MiFID “are still to be fulfilled”, most agree that the directive has led to an acceptance that pan-European trading platforms are the future. This, they point out, has been reaffirmed by the launch of rival products by incumbents such as LSE’s pan-European dark pool MTF, Baikal.
Additionally, the potential for a breakaway of platforms delivering asset class products outside of equities – like derivatives and fixed income – is one reason MTFs are refusing to write off 2009.
“There are many aspects of equity-only trading venues that would appeal to other asset classes, such as the transparency and visibility of having a central counterparty,” believes Eli Lederman, CEO of Turquoise.
“It certainly would have been more positive for the world if credit default swaps had behaved in the same way (as equities).
In terms of leveraging equity platforms’ infrastructure, non-equity asset classes can gain a lot,” he says.
Andrew Silverman, managing director of electronic trading at Morgan Stanley, suggests that the growth of multi-asset trading platforms is likely because venues need to be able to create liquidity streams to survive, and not just join the dots through providing best execution. “To be honest, I don’t think anybody only trades equities nowadays and it’s inevitable we will go down that road (of multi-asset platforms),” he says.
And given the balance sheet implications of increasing fragmentation, rising competition, and the failure of MTFs to attract the sort of liquidity hoped for in an early-stage industry, alternative trading venues cannot help but look at other sources of business, argues Artur Fischer, joint CEO of Equiduct Trading. “This will include other asset classes and at this moment in time, everything is possible,” he says, “though Equiduct will concentrate on being a pure-play host for equities for now.”
Turquoise’s Mr Lederman reckons there is big potential for platforms to offer services and products beyond the plain vanilla automation of equity markets. “It is 2009 and looking at equities, it remains as a job ‘not yet done’,” he concludes. “The overwhelming majority of MTFs and exchanges are unidimensional, though there is the possibility to provide non-unidimensional products and look at dark pools, different functionality and different order types... and focus on larger orders.”
One step nearer to achieving the full multi-asset, multi-instrument product range are venues like NYSE Euronext and LSE, claim their respective sales chiefs. “We are the most diversified globally with four asset classes on our books,” boasts Cees Vermaas, NYSE Euronext’s sales and relationship management director who also sells on behalf of Arca Europe, its MTF.
He believes that hosting trades for non-securities, like interest rate derivatives and bonds, doesn’t mean the bread and butter of equities is automatically neglected. “We aren’t going to cannibalise our own equities,” he says.
Hugh Brown, head of secondary markets product development at LSE, agrees that platforms that are more at home in stocks and shares are still well-positioned to expand equity-only markets into other asset classes. “We have a multi-asset, multi-geography offering and are the leading government bond trading venue. We also list fixed income exchange traded funds and exchange traded commodities to fill the gaps in providing equity-like product,” he adds.
But does the real competition for MTFs come not from each other but from the broker-dealer community, which many argue are acting and behaving increasingly like exchanges especially in dark pools orders?
One nervous MTF is Nasdaq OMX Europe, whose president Charlotte Crosswell forecasts more broker-dealers getting their MTF licences this year as the push for liquidity intensifies, though she believes this is what the state of the marketplace post-MiFID is all about.
Mr Vermaas is more sanguine. “This is what MiFID created – it’s a legacy – yet I don’t see any competition from the broker-dealer side. We work together,” he adds.
