Market fragments post-MiFID

01 March 2008News

Predictions of greater competition for traditional exchanges are coming true.

Information giant Reuters has released new figures showing that the European equity market has fragmented since the introduction of the Market in Financial Instruments Directive last November, with new entrant MarkitBoat making inroads into the publication of trades once carried by domestic exchanges.

In each of the first three months of MiFID, MarkitBOAT has achieved the third highest value of trades reported across all European equities after Euronext and the London Stock Exchange. In fourth place was Xetra (see table below).

These figures confirm that European stocks are exhibiting the trends that many predicted before MiFID came into operation: the market is fragmenting and many domestic exchanges are losing some of their traditional franchises as traders use alternative venues.

And this trend is unlikely to abate, said Hugo Jenkins, managing director of the Futures and Options Association, a European industry association for firms and institutions dealing in futures, options and other derivatives. “Large investment banks are increasingly uncomfortable with their positions with regards to for-profit exchanges. Project Rainbow and Four Seasons, for example, are initiatives from banks which signal that they want to take advantage of the post-MiFID environment. Institutions feel that it is necessary to compete with incumbent exchanges to get the quality of service and low costs they want.”

Jenkins refers to the initiatives of several investment banks, Project Rainbow in Europe and Project Four Seasons in the US, to break into financial derivatives trading, similar to Project Turquoise, the pan-European multilateral equities trading platform, which will target Europe’s traditional stock exchanges. Project Rainbow is backed by Barclays, Deutsche Bank, Goldman Sachs, JPMorgan, MF Global, NewEdge and UBS; while Four Seasons is made up of 12 large derivatives houses: Bank of America, Barclays Capital, Citadel, Citi, Credit Suisse, Deutsche Bank Securities, E-Speed, Getco, JPMorgan, Merrill Lynch, Peak6, and Royal Bank of Scotland.

Project Turquoise is beginning to gain momentum after a stuttered start. Chief executive Eli Lederman recently announced that the platform will go live in September, almost a year behind its original launch date.

Turquoise began in November 2006 with the backing of a consortium of seven investment banks, including Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS. In October BNP Paribas and Société Générale Corporate & Investment Banking also joined the consortium.

Lederman said that Turquoise is in “execution mode”. Testing on site has begun with partners and Lederman expects a “crescendo” over the summer when members begin testing. It has partnered with testing firm AppLabs to ensure that the trading platform is fit for purpose. AppLabs will design, develop and build the test strategy for the project, and then test the trading and surveillance functionalities to ensure Turquoise launches.

This follows a series of technology partnerships. In April 2007, Turquoise announced that the clearing and settlement function will be delivered by EuroCCP, a subsidiary of DTCC. In October Cinnober, the Swedish technology provider, agreed to supply the trading platform technology; and in January this year Apama and Detica agreed to provide a real time market surveillance system.

Most recently it has chosen BT for secure hosting services and low-latency connectivity. Turquoise will offer users direct access to the trading platform and the option to co-locate their trading engines with BT to achieve “near-zero” trading latency. For resiliency, Turquoise will be hosted in two BT’s data centres in London. The data centres will be connected for synchronous data transfer. Turquoise member firms will be able to access the trading facility through a choice of connectivity options including the Radianz Shared Market Infrastructure.

Yann L’Huillier, chief technology officer of Turquoise, said: “It is vital that we deliver on our aim of providing a platform capable of providing high throughputs with very low latency over a trusted network that will have the capacity to allow our users to co-locate. The BT solution offers us a home for our platform that has capacity, speed and trust.”

All European equities – % share by value for all trades

January 08	December 07	November 07
Euronext (incl OTC)	18.34%	19.51%	17.39%
LSE (incl OTC)	15.97%	17.59%	18.35%
MarkitBoat	15.72%	17.10%	17.52%
Xetra (incl OTC)	15.60%	13.85%	13.29%