Securities Industry Outlook for 2008
Subprime Crisis Exposes Data Inadequacies | Finra Is Proving 'Principled' | IT Rising to Asset Servicing Challenges | Interdealer Platforms Point the Way | Turquoise Tests Known Strengths in New Arena | ATSs Gear Up for Global Fragmentation
ATSs Gear Up for Global Fragmentation
U.S.-based operators await market structure changes in Europe, Canada, Asia
January 7, 2008
As the world's financial markets edge closer to U.S.-style fragmentation, U.S. firms are putting their know-how and solutions to work in other countries--and hoping that the market structure changes pick up speed.
In Canada--closest to the U.S. not only geographically but also in terms of market efficiency--a number of competitors to existing exchanges have emerged. Such alternative execution venues prompt market fragmentation, but--as has occurred in the U.S.--can press slow-moving exchanges to become more efficient, faster and cheaper.
The big prize, however, is Europe, whose businesses have market capitalizations similar to those in the U.S. Asia too is showing signs of moving toward a more fluid structure, but unlike Europe it has no unifying regulations, and rules governing the creation of alternative trading systems (ATSs) can be prohibitive.
The European Union's Markets in Financial Instruments Directive (MiFID), effective Nov. 1, requires brokers to set best-execution policies, including exploring all relevant quotes. In combination with improved technology and a greater understanding of the new venues, MiFID is expected to encourage a security's quotes to be displayed on competing exchanges as well as ATSs. Early-bird U.S. firms, such as Investment Technology Group (ITG) and Liquidnet, who for years have operated European dark books--venues that do not display quotes and execute orders anonymously--are gearing up for rapid change.
"In 2008, we're going to start to see the knock-on effects of MiFID," said Robert Gasser, president and CEO of New York-based ITG, adding that the regulation is not anticipated to result in a "big bang" but "an evolution in market structure prompting fragmentation and more competition to the major exchanges."
Like the Securities and Exchange Commission's Regulation ATS in 1998, MiFID is "democratizing the quote" so brokerages can't "afford to ignore quotes off the exchange anymore," Gasser said. Though he declined to provide order volumes for the agency brokerage's European dark book, ITG has been a tenacious promoter of alternative trading services across the Atlantic, introducing in 1997 a point-in-time matching service and in February the Posit Now continuous matching service. Early this year, the firm plans to launch Posit Alert, the European version of Block Alert in the U.S., which gives institutional traders the ability to share information prior to a trade.
Five years ago New York-based Liquidnet went live in the U.K. and four of the largest European markets and has seen its principal volume double each year, according to John Barker, managing director of Liquidnet Europe. It reached GBP9.1 billion ($18 million) in the quarter ended Sept. 30, up 22 percent from the previous quarter and 131 percent year over year. In November, daily average share volume rose 23 percent, to 32 million from 26 million.
Liquidnet is in 22 European markets, according to Barker, with Spain, Hungary, the Czech Republic and Greece added last year. Turkey and Cypress are expected to go live this month.
Liquidnet Europe customers can trade stocks listed on the Johannesburg Stock Exchange. Using Europe as a springboard, Barker said that Liquidnet over the next 18 months is aiming to establish operations in South Africa to attract local asset managers before turning to other potential African markets such as Ghana and Kenya. He added, "In a quarter or two, I'm going to start looking at the Middle East, talking to asset managers there to get their views on block trading."
