Fragmentation to Spread

Terry Flanagan

With the U.S. usually at a more mature stage when it comes to market structure, it’s only a matter of time until fragmentation makes its way to less developed and emerging markets as well.

“Generally, as far as market structure, the U.S. has taken the lead,” said Tim Mahoney, chief executive officer of Bids Trading. We’ve had competition in the U.S. since 1975. Granted it was only exchanges then, but it was the concept of competition.”

While the U.S. is usually at a more developed stage in terms of market structure, they are only a few short steps ahead of those across the pond.

“You’re seeing it in Europe now,” said Mahoney. “They have maybe 20 or so, but there’s not as many there. They’re still working out the rules. Mifid isn’t done. When it’s done, you will see new competitors.”

The advent of regulation such as Mifid, or Markets in Financial Instruments Directive, in Europe has allowed a slew of multilateral trading facilities to permeate the marketplace and capture market share from the incumbents. The London Stock Exchange has seen its market share drop substantially to one of the most successful of these upstarts, Chi-X Europe, an MTF founded in 2007 by agency broker Instinet. Chi-X Europe has grown to about 20 percent overall market share in Europe, while the LSE’s market share in its home country has dropped from a virtual monopoly to about 51 percent in just a few years. It has forced exchanges to lower fees as well as even join in. In the case of the LSE, it acquired a majority in interest in Turquoise, a bank-owned MTF, in late 2009.

At the end of the day, the business of running exchanges and trading platforms is not entirely too complicated, it boils down to being able to do the core aspects well.

“We have a really simple end game in this business,” said Mahoney. “If your venue can help lower the cost of transaction, if you can trade a large block effectively, trade smaller pieces quickly, and have a lot of liquidity, you will survive.”

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