As I’ve discussed before, the market disruption wrought by MiFID was bound to see a jostling for position between the established players and the new market entrants. For the primary venues this means overcoming the inertia associated with their old operating models whilst for the new guys the imperative is to create real momentum behind their brands.
The FFI for the major European indices gives a few pointers as to the results of these efforts. Whilst fragmentation continues its inexorable rise across all the major indices – last week the FFI for the FTSE100 breached 2 for the first time – it seems likely that we will end up with a landscape that is pan-European in nature rather than country specific. The data for Chi-X and BATS seems to bear this out as their respective Top Stocks by Weekly Turnover include stocks from London, Paris, Frankfurt and Amsterdam. Turquoise appears to buck this trend as its “top ten” comprises either UK or Swiss listed stocks but, nevertheless, the idea that a primary exchange has a divine right to “own” the trading in its own country’s stocks looks increasingly likely to be a thing of the past.
To meet this challenge the primary exchanges are taking a number of different approaches. They are creating their own versions of the nimble, pan-European MTFs that have sprung up as their competitors. NYSE Euronext has now launched NYSE Arca and has signed 14 trading members to SmartPool, whilst the LSE has successfully re-aligned and launched Baikal in just a few months since the demise of its original partner, Lehmans.
The primaries have started to flex their muscles in other areas, too. Exploiting their multi- and cross-asset capabilities is an obvious way to increase the stakes. The LSE, NYSE Euronext and Deutsche Börse all have capabilities in the fixed income and derivatives arenas that the new MTFs will find difficult to emulate, for two reasons. First, there is cost: the MTF community is still focussed on proving the long-term sustainability of their existing, equity focussed business models. This means that strategic investment in adding new asset classes looks hard for them at the moment. The second is that, at least with derivatives, the exchanges actually do own the contracts being traded and so it is much harder for newcomers to wrestle liquidity in these instruments away from the incumbents.
It was interesting, therefore, to read Xavier Rolet’s comments this week that the LSE plans to launch a platform to make corporate bonds more easily accessible to the UK retail market. This will build on the MOT fixed income platform that came with its acquisition of Borsa Italiana in 2007 and is a great example of the new thinking that is emerging within the primary exchanges.