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Cross-Border Trading Gets Real
November 21, 2006
Since the 2000-2001 market downturn, many investors have looked internationally for better opportunities. Despite some moves during the prior technology boom to develop cross-border trading platforms and market connectivity, infrastructure was lacking. Today, however, market globalization and cross-border trading are all the rage--NYSE Group's pursuit of a merger with the Euronext exchanges is but one, obvious reflection--and the efforts of technology vendors to facilitate global trading are bearing fruit.
"The world is getting smaller," remarks Larry Tabb, founder and CEO of Westborough, Mass. research and consulting firm Tabb Group. "Brokers have expanded globally, and now the market centers are following suit."
Trading technology, as within domestic markets, is advancing. The pace of trade executions is accelerating, and costs are dropping. Emerging markets are opening up. Investment strategies and algorithms are increasingly intricate, encompassing multiple asset classes and currencies at once.
Attempted cross-border mergers during the dot-com days--remember the Deutsche Borse's abortive attempt to merge with the London Stock Exchange (LSE), or the Morgan Stanley-OM Group (now OMX) joint venture Jiway?--are now distant memories as both NYSE and Deutsche Borse are wooing Euronext and the Nasdaq Stock Market is expected to want to build on its 25.1 percent stake in LSE. NYSE isn't content just to build an exchange empire; it's also buying technology--in September it acquired a stake in Marco Polo Network, whose TradeTraveller system provides connectivity to markets throughout Asia, Europe, the Middle East, Africa and Latin America.
The derivatives front is at least as active: the Chicago Mercantile Exchange in October announced an $8 billion takeover of the Chicago Board of Trade, and cost savings are to go partly toward European and Asian expansion.
Most of today's action in international stock order entry and execution occurs within and among brokerage firms on behalf of clients. These firms may eventually benefit from further cross-border exchange consolidation, especially to serve institutional investors, but they haven't waited idly for it to happen. Bulge-bracket firms with global footprints, such as Goldman Sachs Group, Merrill Lynch & Co. and Morgan Stanley, have robust platforms for multinational, multicurrency, multi-asset-class trading, analytics and prime brokerage. UBS, for one, touts its Direct Strategy Access as a "suite of sophisticated strategies uniting our liquidity, technology and global reach to help clients achieve superior execution. UBS's advanced tools predict trading trends by combining historical tick data with real-time analysis and quantitative models with our unrivaled liquidity network."
Other technology-driven firms have been ramping up their services, anticipating growth in transnational trading. "The global trading environment is getting more interesting," says Tom Price, senior research analyst at Needham, Mass.-based TowerGroup. "There are more players entering the space, and a growing number of ways to trade cross-border."
Agencies and Frontiers
Agency brokerages with an international flavor are growing and proliferating. New York-based, privately owned Instinet is catching that wave, setting its sights on Europe in particular with Chi-X, a multilateral trading facility, on top of the firm's already significant direct-market access (DMA) offerings. The European Markets in Financial Instruments Directive (MiFID) creates fertile ground for a product like Chi-X, according to Glenn Lesko, Instinet's head of U.S.-based international sales and trading. "Never before was there a legal framework for people to develop new stock exchanges," he notes. "[MiFID] is essentially allowing a more level playing field where alternative markets can be created. We will be one of the first to take advantage of it." Lesko adds that he also sees the directive as a catalyst for exchange consolidation.
