New Levels of Competition Will Lead to a Rapid Transformation of Equity Trading Across Europe, Says TABB Group

The door to competition has been blown off its hinges by the adoption of the Markets in Financial Instruments Directive (MiFID), leading to wholesale change in the European equity markets as twenty Multi–Trading Facilities (MTFs) are offering or planning to offer trading on a pan–European basis by the end of 2008. Changes to both the way trading occurs in the lit markets and in dark pools is underway, and the incumbent exchanges are facing unparalleled challenges to their market share from new trading venues, which are supported by regulation and members alike.

According to a new industry research study published today by TABB Group, "European Equity Market Structure: Liquidity, Trust and Competition," the new competitors, some of which are being launched by exchanges themselves, will win 21% market share over next three years before consolidation occurs. In a bid to differentiate their products, the MTFs will invest in new matching functions, targeting different audiences and offering a variety of business models, technologies and pricing models. The competition they offer will attract new entrants and increase trading volume by 17% in 2009.

"Changes in regulation, market structure, technology and cost are combining to alter the way that liquidity is formed, what execution venues look like and the tools participants need to access the market," says senior consultant Miranda Mizen, co–author of the study with Andrew Howieson, managing director of TABB Group Europe. "With the arrival of competition, explains Mizen, the marketplace has already started to fragment and this is about to accelerate. There is no question that exchanges will lose market share to the MTFs, requiring them to fight hard to retain their commanding position as their cost structures struggle with cumbersome legacy environments, lost revenue and pricing wars." In a bid to be competitive, some exchanges are entering the competitive fray by launching MTFs, while others play a waiting game. Competing MTFs will overlap as exchanges launch their own dark pools, explains Howieson, as MTFs target both the buy side and sell side, and liquidity aggregators offer electronic services. "Competition will be fierce and eventually lead to over–crowding by MTFs, triggering mergers and acquisitions, not to mention a few flops. While it may take three to four years before serious consolidation, exchange consolidation in the shorter term is more likely as the impact on their long–term profitability becomes evident more quickly and they seek to proactively protect their future."

Focusing also on brokers in Europe, Mizen and Howieson explain how they too are repositioning themselves as the trading environment shifts from a series of consolidated vertical markets to a pan–European, horizontal environment, as liquidity splinters into dark and lit pools and as traditional pricing models collapse (see Executive Summary´s Dark vs. Lit Liquidity exhibit). To position themselves as "gateways to the execution process" by mirroring the complex, pan–European trading environment, TABB Group estimates that brokers will continue to spend a 3% compound annual growth rate (CAGR) for the next two years in Europe as the landscape continues to be transformed, even accounting for reductions in global expenditure.

"What is undisputed," comments Adam Sussman, director of research at TABB Group, "is the threat to the exchanges as new venues target their market share and newcomers look to disintermediate the exchanges by offering matching services upstream in the execution process. What is open to debate is the extent to which the landscape will be metamorphosed, the likely winners and losers, and who will ultimately benefit from the changes."

The 52–page interview–based study with 18 exhibits can be accessed by TABB Group Research Alliance Equity Service clients and qualified media at https://www.tabbgroup.com/Login.aspx. To request an Executive Summary or to purchase the study, visit http://www.tabbgroup.com/Page.aspx?MenuID=13&ParentMenuID=2&PageID=8.

About TABB Group

TABB Group is the financial markets industry´s only research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the proven interview–based research methodology of "first–person knowledge" developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange and custodian, helping senior business leaders gain a truer, actionable understanding of financial markets issues. For more information, visit www.tabbgroup.com.