Chi-X exploits LSE’s weaknesses further

There’s plenty of innovation in banking right now, from investment through commercial to retail banking. And it’s not just amongst the big banks, the thriving banks and the growing banks but amongst the struggling banks, the tarnished banks and the zombie banks too.  For example, Citi is spending a billion dollars on new payments technologies this year, and there's plenty of innovation in their transactions services business.

But some innovators create new business models at the expense of the incumbents - that's the way it's supposed to be, isn't it?

This is no better illustrated than by the announcement of the London Stock Exchange (LSE) which has faced continuing difficulties, as shown by their 37% drop in profits when the FTSE almost doubled in value during the same period.

This is a strong indication of how innovators are disrupting, such as BATS Europe.  But the key innovator with first mover advantage is Chi-X, who launched over two years ago.

Announcing their results for the period between April 1st and September 30th yesterday, the LSE let it be known that the total number of trades in UK shares dealt on the exchange dropped 17% to 78.4 million, with the value of the shares traded falling 46% to £580 billion.

This is during a period when, between March and August, investors have seen the biggest rally in shares in half a century with the value of British shares up from £454 billion to £1.44 trillion.

This is why Xavier Rolet has cut prices and continues to do so (doesn't work), has shrunk the LSE’s workforce by 11% (let's shrink our way out of this), thrown out their TradElect flagship system (which just doesn’t work and broke again today) and is in talks to buy Turquoise (who are also struggling thanks to the Chi-X onslaught).

And how big is that onslaught?

Let’s put it this way, it now has such a large share of trading in most European exchanges that it is now the third largest trading platform for equities tradingl, just behind the Deutsche Bourse and Euronext, and bigger than Spain’s national stock exchange and the Swiss bourse.

It has managed to take a quarter of the trading in the FTSE 100 from the LSE, and this looks likely to increase, especially if LSE’s outages continue.

So what does Chi-X go and do? They only announce the next day that they intend to hire Alasdair Haynes, the hotly tipped contender to have taken the job that Xavier Rolet took earlier this year and also back in 2001.

In other words, the man who should have been CEO of the LSE is now the CEO of its likely slayer and successor, Chi-X.

Funny how the world turns isn’t it?

What would I do if I were heading the LSE, as it is easy to criticise and hard to strategise.

I would change the battleground and create a new market territory for the LSE outside the razor-thin margins of trading the most liquid stocks.

Focus upon creating new markets or generate a new platform offering razor-thin margin trading in other stocks or instruments

The trouble with this strategy is that with 75% of their business tied to the most liquid stocks today, it is too hard to consider as an acceptable approach.  It is too radical.

The thing is that all the radical things the LSE has tried so far have failed, and are likely to continue in this fashion unless they do something radical.

Meanwhile, the 75% liquidity isn't going to disappear overnight so keep that fat margin to fund the next generation of thin margin, and broaden and deepen the platforms.

They may well be doing this, with the implementation of MillenniumIT and acquisition of Turquoise, except that both appear to be second choice solutions to compete with Chi-X rather than first choice solutions to create a new battleground.

Roll on the next six months ...

Note: BATS Europe are also doing OK, with Bloomberg reporting that they “'aim to do between 8 percent and 10 percent by the end
of the next year, doubling our market share in 2010' according to CEO Mark Hemsley
said. 'We have a lot of new firms coming over and we’re
benefiting from the increasing sophistication of the trading
systems of the big brokers we signed up in the first wave.'

“Over the past five days, Bats Europe accounted for about 8
percent of U.K. FTSE 100 trading, 4 percent of France’s CAC 40
and 3.3 percent of Germany’s DAX on average, according to data
from Bats. London-based Chi-X Europe drew about 25 percent, 17
percent and 19 percent, respectively.”

Note: Wall Street Journal headline - MTFs Capture 54% Of Europe's Dark Markets

A trio of alternative trading systems has seized more than half of
Europe's "dark" equities market from broker-run rivals in just six
months.

Chi-X Europe, Turquoise and Bats Europe together handled 54% of all
trades executed by public dark pools in the month to November 19,
according to Thomson Reuters. None of the multilateral trading
facilities operated a dark pool before May.

Meanwhile, three established dark pools, Liquidnet Europe, ITG
Posit and Nyfix Euro Millennium, saw their share of the market shrink
to 39% in November from 98% in May, Thomson Reuters said. ITG launched
Posit in 1998, while Liquidnet Europe went live in 2002 and Euro
Millennium has been operating for 18 months.