Among the many financial trading and IT conferences I have attended over the years - from TradeTech in Paris to Burgenstock in Montreux, Switzerland, and beyond - the question has always arisen as to how many stock and derivatives exchanges there would be in three, five or ten years time. Depending on who you canvassed the answer would always be different. Perhaps not that surprising I suppose. Some pundits suggested that in the end analysis there would be five or six global exchange groups.
Take the U.S. for starters. Here seven parent exchange organisations operated 12 trading venues for listed equities options by mid 2013. Some of these exchanges (CBOE,
Indeed, Aite Group, a Boston-headquartered research firm, published a weighty 60-page white paper last October on the subject titled ‘Seven, Eleven, and Now Twelve: How Many U.S. Equity Options Exchanges Are Enough?’, contending that the situation would only result in even more liquidity fragmentation, rising IT costs and a constant battle to update more than 3,500 names (stock and index options combined) and over 500,000 options series to quote and route orders to - all with minimal latency.
Just keeping up is 'one costly and complicated technology requirement for exchanges, market-makers and order-routing brokers alike' as Aite’s paper noted. And, perhaps it is not so surprising that IT outages at exchanges are becoming more of a common occurrence.
In Europe, which until recently had witnessed exchange and MTF (Multi-Lateral Trading Facility) proliferation by the bucketful before a reconsolidation, most of the new venues largely trading equities were hardly profitable and either folded or were snapped up by the big incumbent exchanges. For example, the
And, just when one thought there would no more new entrants in Europe, Aquis Exchange, a pan-European stock exchange headed up by industry veteran Alasdair Haynes who was once in the running to head up LSEG, came into play. Established in October 2012 Aquis applied for regulatory approval as an MTF from the UK’s Financial Conduct Authority.
Clearly the opening of this MTF’s doors to the BT Radianz Cloud community was touted as providing them with an opportunity to gain rapid access to the widest possible range of market participants and traders with the alluring benefits of a subscription pricing mode.
However, have we not been here before? Aquis joined over 100 trading venues that were already part of the BT Radianz Cloud community and one wonders how much longer that number can be maintained. To its credit Aquis sought at the outset to 'revolutionize' the European trading landscape by introducing subscription pricing and innovative order types. Others have tried before and not always met with success.
It was the Markets in Financial Instrument Directive (MiFID) in Europe that resulted in a plethora of trading venues springing up and ultimately caused a significant contraction in tariffs for trading equities and other securities. This was much welcomed by banks and broking houses who felt they were this being milked by incumbents in the shape of the LSE and Deutsche Boerse amongst others.
At one point post ‘MiFID I’ coming into play there were nineteen separate trading venues for UK equities, while Europe became home to 27 exchanges and 19 MTFs. Clearly it spurred competition but such fragmentation was not sustainable And, so it proved. Mondo Visione, a UK-based firm monitoring the share price performances of quoted exchanges globally, still analyses 25 such entities in its FTSE Mondo Visione Exchanges Index.
In the intervening years new players - MTFs and dark pools - have either closed down or been acquired by stronger operators. With the average trade execution cost for trading equities in Europe having plummeted from 2 basis points (bps) at MiFID’s outset to around 0.2bps now it is easy to understand why the commercial model for many was simply unsustainable. The upshot was that many new entrants operated at a loss, with just a few at breakeven point and fewer still in profit.
Exchange venue fragmentation subsequently gave way industry reconsolidation. And, even the big operators - the LSEG included via its LCH.Clearnet acquisition - have sought to provide their customers with value-added services on the post-trade side - in clearing and settlement. This unsexy side of the business is now reaping rich returns.
The current position where over 90% of European equity trading in each individual European country takes place on just two exchanges equally might not be viewed as that positive either. Aquis’ aim like rival exchanges/MTFs was to give a shot in the arm for competition and reduce trading costs maintained for ages by the big exchanges. It was certainly an admirable goal.
While price and choice are one thing, critically it all comes down to liquidity, speed of execution, value-added offerings across the trading lifecyle (front to back) and the most efficient model - be it vertical, horizontal or hybrid. Realistically it is hard to see imagine over twenty plus quoted exchanges being around in five years time, but less than five might be pushing it.
