As 2008 progresses, some organisations are realising the true meaning of the Markets in Financial Instruments Directive, MiFID.
First you have the new upstarts: Chi-X, Turquoise, BATS Europe,
Equiduct, NASDAQ OMX Europe and more circling to take advantage. All of
these Multilateral Trading Facilities (MTFs) have low latency, low
price and low cost streamlined operations, and are trying hard to
cash-in on the pan-European cash equities trading opportunities that
MiFID has created.
Then you have the incumbent cash equity exchanges, led by the big boys
of Deutsche Boerse, Euronext and the London Stock Exchange (LSE), and
they're struggling with share prices down by half this year as a result
of these new competitive threats.
Deutsche Boerse and Euronext have certainly seen the impact in their
cash equities business with Chi-X, the first MTF launched last year by
Instinet, peaking at a 15.08% market share of the DAX30 and 9.39% of
the CAC40 on certain days of June. Luckily, Deutsche Boerse and
Euronext have a balanced business with global diversification and
large-scale derivatives operations in Eurex and LIFFE respectively.
Then you have the LSE, and it’s not been so easy for them.
You only have to look at their share price which is down by almost
two-thirds, far more seriously impacted than the Deutsche Boerse and
After a rock and roll ride on the share price from 2004, with various
predators circling to buy their business, the LSE is now languishing at
a lowly 745 per share today. Mind you that’s still well up on the just
over 316 per share you would have paid in 2003, but nowhere near the
high of 2002 earlier this year.
What’s going on?
MiFID’s going on.
Chi-X has been the first to shoot holes in the LSE’s business model, peaking at over 20% of FTSE 100 trading last week.
Similarly Turquoise, which started live trading
last Friday, believes it could take up to half the liquidity away from
the LSE. That would be due to the strength of the liquidity pool
represented by the nine firms who created Turquoise: BNP Paribas, Citi,
Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan
Stanley, Société Générale and UBS. These firms have guaranteed
Turquoise's liquidity from day one.
Now you have BATS announcing yesterday that they aim to take at least 15% of the FTSE 100 share trading operations by the end of 2009.
With PLUS Markets nibbling away at the mid-caps; MarkitBOAT and Chi-X
stealing nearly a third of all trade reporting activities; and Dark
Pools appearing from all directions; it’s no wonder that everyone is
wondering what the LSE are going to do.
What they claim to be doing is becoming aggressively competitive with
TradElect providing low latency and their fee structures slashed for
high volume traders. However, with around 450 staff in London and a
spend of over £40 million on TradElect, the LSE has a more serious
issue. After all, BATS have six staff in Europe right now, and
Turquoise and Chi-X around forty each. Their spend on technology has
been a fraction of the LSE’s and yet, between them, they will be
running anything from a half to three-quarters of the FTSE100 liquidity
pool by the end of next year, and deepening their waters into the
FTSE250 and more.
Therefore, low latency, low price, low cost trading facilities are the
way of the future, not low latency, low price, high cost. That’s
Meanwhile, LSE’s joint venture with Lehmans to open their own dark
pool, Baikal; the acquisition of Bourse Italiana; and extending the
operation of the derivatives exchange EDX, are critical parts of their
survival plan. But I’m looking for a few more pieces of the strategy
before I’d think about buying into their shares today.