There has been a lot of coverage of the LSE’s first half results this week. Most of the comment seems to focus on the erosion of its market share by the MTFs and whether the pricing of the MTFs is sustainable in the long term. Whilst there is little doubt that these are both valid areas for discussion, I wonder whether there are some more subtle issues involved.
Firstly, it’s not just about pricing per se but about pricing models. The MTFs have adopted maker/taker models that reward those traders posting liquidity on their platforms whilst charging those who remove it. This favours the Electronic Liquidity Providers at the expense of the large banks and brokers which generally prefer a wholesale discount pricing structure. The LSE has switched between both pricing models and, to date, neither approach seems to have stopped its market share from declining. Ironically, though, this is where the LSE (and other primaries) may have an advantage. This is because they can use the various MTFs they have built (or acquired) to separately meet the needs of these different market segments. In this way, they can create a range of sub-brands that can experiment simultaneously with different pricing/delivery models (how about trading FTSE 100 stocks in Euros, for example?). And, just like the high street supermarkets, shoppers benefit from the economies of scale regardless of whether they buy premium, regular or budget priced products.
Another point that maybe needs more emphasis concerns exactly who the enemy is. Maybe the real challenge for the LSE is less about protecting its UK market share from “troublesome MTFs” and more about establishing the LSE Group as a genuine European/global supermarket for stock and other financial instrument trading. Deutsche Börse’s creation of its international market (XIM) demonstrates where its own thinking is heading in this regard and, of course, NYSE Euronext has always made a big play about its pan-global, multi-asset credentials. The LSE, however, has a number of situational advantages in this battle, too – not least of which is the fact that London is generally seen as the financial trading capital of Europe. In addition, it has its acquisition of Borsa Italiana and its Canadian and Japanese connections to play on.
The MTFs face a similar dilemma. Is the enemy the primary exchanges or should they be vying instead to establish themselves as best alternative trading venue for Europe? Breathing down their necks are the ELPs and other market makers who have realised that, in the post-MiFID world, maybe they don’t need venues at all and can instead interact with order flow directly.
As the folks in Brussels start writing the script for MiFID 2 “where we went wrong and what we intend to do about it”, it looks like there is some doubt over what the right shaped entity for pan-European equities trading really is. Maybe the answer lies in the old axiom – keep your friends close and your enemies closer still.