US electronic networks step on exchanges’ toes
By Anuj Gangahar in New York
Published: October 17 2008 12:38 | Last updated: October 17 2008 12:38
The line between exchanges and electronic communications networks is blurring, as the two leading US ECNs grow ever closer to attaining full exchange status, adding to the already fierce competition among trading venues.
The two ECNs in question – BATS and Direct Edge – have been taking market share away from the historically dominant New York Stock Exchange and Nasdaq in recent times.
The new threat comes as the stock exchange business has been undergoing a revolution, with a series of mergers leading to rapid consolidation while new entrants continue to try to take a piece of the action.
The opportunity springs from the growing take-up of electronic trading, which has seen volumes explode and the speed of trading now measured in microseconds.
BATS Trading, based in Kansas City, has undercut traditional exchanges on fees since its inception three years ago, and has now received SEC approval for exchange status and plans to launch its National Securities Exchange this month.
Meanwhile, Direct Edge has formed a partnership with the International Securities Exchange (ISE) that will advance its transition to exchange status.
The progress of BATS in particular has led to criticism from some quarters, with some observers claiming it was successful only because the prices it charges are unsustainably low.
But it seems clear that the threat it represents is a real one that exchanges can no longer ignore.
Many of the users of BATS also have a vested interest in its success. It is backed by an ownership group that includes affiliates of Citigroup, Credit Suisse, Deutsche Bank, Getco, JPMorgan, Lehman Brothers, Lime Brokerage, Morgan Stanley, Merrill Lynch, software developer Tradebot, and investment bank Tradebot.
The progress of BATS continued last week as it won regulatory approval for a European offering that will compete with the London Stock Exchange, initially trading in UK stocks, with continental European stocks set to follow.
The European launch will come after the launch of two rival platforms – Turquoise and a “pan-European market” backed by Nasdaq OMX. All three will provide added competition for incumbent exchanges in Europe, which have already seen the emergence of Chi-X, another investment bank-backed equities platform.
These multilateral trading facilities (MTFs) have emerged recently and are designed to take advantage of stock trading rules under the European Union’s Mifid directive.
Unlike Turquoise and Chi-X, BATS has a track record in the US, where it is already executing, or matching, 10 per cent of all US equities volume on its platform.
As a result of platforms such as BATS, Nasdaq and others, the New York Stock Exchange has seen its share of NYSE-listed stocks fall to about 25 per cent of trades on publicly visible markets, according to Equity Research Desk, a consultancy.
The arrival of BATS as an exchange should allow it to compete more effectively with the NYSE and Nasdaq, as it will no longer have to route its quotes through other exchanges to get them to the market.
Separately, International Securities Exchange, one of the largest US options markets, recently became the largest shareholder in Direct Edge.
This move further blurs the lines between established exchanges and alternative equities platforms.
The deal between Direct Edge and the ISE also marks the first involvement by a European exchange in the competitive US equities market. ISE is owned by Frankfurt-based Deutsche Börse.
Direct Edge is owned by a consortium including Knight Capital Group, Chicago-based hedge fund Citadel, and Goldman Sachs.
Under the deal, ISE Holdings, the parent company of ISE Stock Exchange, will invest $123m in Direct Edge, giving it a 31.5 per cent stake, and Knight, Citadel and Goldman Sachs will reduce their stakes to 19.9 per cent each.
At the same time, the ISE’s stock exchange unit will become a subsidiary of Direct Edge.
The ISE Stock Exchange was set up about two years ago and operates an equities platform that combines a traditional “displayed” market, alongside a “dark pool”, offering anonymous block trading.
ISE will also provide technology to Direct Edge, which will continue operating under its own brand.
Direct Edge says that the deal will allow it to “position itself to meet the regulatory requirements necessary to become an exchange”.
The ideal model for exchange groups remains unclear, however, as continuing volatility in the markets sends volumes soaring.
After one of the most volatile trading weeks in the history of Wall Street, The Depository Trust & Clearing Corporation (DTCC) processed a record 209m sides of a trade on Friday October 10 – a 15 per cent increase on the previous record of 182m achieved last month.
Copyright The Financial Times Limited 2008 |
