10.26.2011
By Terry Flanagan

New Venues Bring Innovation

With the markets becoming increasingly competitive with a proliferation of trading venues, it’s up to newcomers to bring innovation.

Any new exchanges or alternative trading systems entering the marketplace must avoid being a “me-too” copy and bring about new ideas.

“Any good idea eventually gets copied and widely disseminated,” said an executive at a prominent broker-dealer. “We used to live in a world where maker-taker pricing didn’t exist, now nearly every exchanges has maker-taker.”

In addition to new pricing structures, the successful ATS’s bring features to the markets that few others can match. Liquidnet, for instance, often touts its large average execution size, which is close to 50,000 shares. Large block trading is something that is otherwise difficult to accomplish on an exchange without impacting the markets.

Agency broker-dealer Instinet has been operating a variety of ATS’s and dark pools throughout its history, with Chi-X Europe perhaps its most successful. Due to low pricing and other innovations, in four years it has grown to be the largest pan-European trading platform operator in Europe.

“If you think about the way these things have played out in the U.S., with Regulation ATS, it allows a broker-dealer to set up an exchange-like venue very cheaply, with a very low hurdle rate,” said the executive. “So the ATS process has allowed innovation to come in, allowed ATS’s to get scale and eventually get bought or absorbed into an exchange. We have this pathway where innovation can happen and we can get it into market structure. Exchanges tend to be slow moving and have not been the center of innovation.”

The evidence of that has the substantial market share that ATS’s have been able to wrest away from the established exchanges. In Canada, ATS’s have been able to garner about 35 percent markets share away from the Toronto Stock Exchange. The London Stock Exchange has just about 51 percent share in its home country.

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