I was chatting with the guys at Fidessa Towers the other day about what constitutes the “right” business model for venues in the post MiFID environment. It’s an interesting question, and one the European regulators seemed to completely ignore when they first introduced MiFID back in November 2007. The evidence so far is uncertain. MiFID has undoubtedly broken up the monopolies of the national exchanges and we are all enjoying lower trading fees as a result. At the same time, though, the industry is struggling to manage both the increased technology costs and the greater complexity associated with the post MiFID world. Buy-sides in particular are claiming that they are paying a high price in terms of lack of transparency and increased transaction complexity.
Any basic economic textbook will tell you that monopolies are not inherently “bad” and that, in some cases, the customer is actually better served by a monopolistic market than a competitive one. Maybe this is one such case? Some of the MTFs that have emerged seem to face an uncertain future and the broker dark pools that have sprung up have fuelled the debate over trade reporting and transparency. Both these issues seem to underline the economists’ argument.
The latest moves by the primaries maybe give us a few clues as to their view of the world. First there was the launch last week of Xetra International Market (XIM) by Deutsche Börse. XIM is a segment on the main Xetra system that will contain 99 non German stocks (i.e. that are listed on other exchanges) that will now be tradable on Xetra. This looks like the first steps by Deutsche Börse towards becoming much more pan European in its approach and will increase its ability to meet the threat of both MTFS and other primary exchanges.
In a similar vein, the LSE announced its support for hidden orders this week – this will allow it to compete with the dark order books of the MTFs and brokers. Also, few people can have missed the announcements that NYSE Euronext has invested huge sums in co-location facilities (and that the LSE is doing the same). It seems that the primaries are now playing to their strengths rather than just launching their own flavour MTFs. Looking ahead maybe the real battle is going to be between the big guys as they slog it out for European dominance.
The irony, of course, is that the market still needs the MTFs in order to keep pricing pressure on the primaries, yet a multitude of different venues operating under different rules creates operational inefficiency in the market as a whole. It would seem, therefore, that finding ways to smooth out these inefficiencies must be the goal for anyone interested in keeping the monopolists at bay.