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Into the Sifma Era | AML Software Landscape Consolidates and Expands | People Are Scarce Again | ATSs in Europe Follow U.S. Lead | Fragmentation's New Discipline: Liquidity Management | Asia Comes Around to Algorithms | Low Latency Not a Go-It-Alone Proposition
ATSs in Europe Follow U.S. Lead
June 18, 2007
But don't expect the Europeans to follow the same pattern of growth and success. "The old adage that liquidity tends to be sticky applies," says Kevin Covington, EVP at connectivity provider BT Radianz in London. "While there has been some competition in London, it has been relatively nonexistent on the Continent."
By eliminating the current "concentration rules" prevalent on the Continent that require stocks to be traded through local markets, MiFID introduces the concept of a multilateral trading facility (MTF), which is fueling an explosion in pan-European trading platforms analogous to the rise of ATSs in the U.S. The MTFs will also compete with systematic internalizers (SIs), or firms that cross orders on their own books--though market players expect only a handful of SIs will emerge in light of the requirement that they meet additional pre-trade pricing transparency rules.
Further fostering the boom in ATSs and making these venues attractive, say market observers, are the adoption of algorithmic trading, the U.K.'s unbundling of research payments from trade execution fees and the use of the FIX protocol for electronic trading.
Changes in the economics of brokerage relationships, and the concentration of commission dollars among a smaller number of large brokers, cause liquidity to be "de-partitioned and fragment[ed] across new execution venues," writes analyst Adam Sussman in a recent report from Westborough, Mass.-based Tabb Group. He predicts that "unification, technology and transparency" will position Europe for rapid growth in electronic trading, with the use of direct-market access (DMA) and algorithmic methodologies growing at a compound annual rate of 50 percent through 2009.
Buy- and sell-side firms don't necessarily have to tap into every exchange or ATS, but they do have to prove they have complied with their own preestablished policies for "best execution," which is defined not only by the price of the security traded, but also by implicit costs related to liquidity and market impact. The onus of compliance is likely to fall more heavily on executing brokers as the decisionmakers for where orders are placed.
"Most fund management firms--with the exception of a handful of the largest--will likely depend on their brokerage firms to comply" with the best-execution mandates, says Alan Jenkins, director of the MiFID practice for global consultancy BearingPoint in London.
New Entrants
Joining the Posit crossing network of New York-based Investment Technology Group (ITG) and the Liquidnet buy-side block-trading marketplace, which are well established in London, are Project Turquoise, Equiduct and Instinet's Chi-X platform. Of the three newcomers, only Chi-X is live. Turquoise, backed by seven of the world's largest investment banks, and Equiduct, using technology from the defunct Nasdaq Europe, are still in planning stages. Coming soon, Securities Industry News has learned, will be Euro Millennium, a pan-European version of the Nyfix Millennium U.S. dark-pool execution facility.
Market players expect up to ten ATS platforms in post-MiFID Europe, but if history is any indication, all will face an uphill battle, made more difficult by preemptive price- and latency-lowering moves by the London Stock Exchange (LSE), Euronext, Deutsche Borse and Virt-x. Deutsche Borse's clearing subsidiary, Eurex Clearing, has also cut fees.
