Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Exchanges

10:37 AM
Kevin McPartland
Kevin McPartland
Commentary
50%
50%

Buy Side Crossing Networks Heat Up in Europe


While cash equity trading in Europe continues to be dominated by the major exchanges, enactment of new regulation, enabled by more sophisticated technology, has resulted in more robust competition for order flow. New liquidity pools that cater directly to the buy side are benefiting from the opening up of the European market encouraged by MiFID, creating alternatives to the established exchanges with some courting both buy and the sell side order flow, while others are focused solely on providing only buy side liquidity.

The buy side is warming up to these new venues, as an increasing number of buy-side traders are connected to crossing networks across Europe, a critical driver for the projected 46 percent CAGR growth in the percentage of value traded by crossing networks over the next two years.

Although crossing blocks off-exchange by brokers has been common in Europe for many years, the creation of independent crossing venues is relatively new. Posit Match arrived in Europe in 1998 with Liquidnet joining the European scene in 2002 and both venues picked up steam as the benefits of trading blocks via dark pools became more widely known and accepted. As the European equity trading landscape began to radically change with the adoption of MiFID in late 2007, others joined the crossing network game. NYFIX's Euro Millenium and Instinet's Blockmatch, which both launched recently, will shortly be joined by Swissblock, followed by Pipeline, Baikal and others over the next six months. Each offers a slightly different target market, methodology and liquidity strategy.

These numerous liquidity pools are creating many new shades of 'dark', as the lines between "dark" and "light" start to blur. All of these alternative trading facilities are registered as multi-lateral trading facilities (MTFs).

Also on the increase is the number of internal dark pools, owned and operated by the bulge bracket brokers. These dark pools are not classified as MTFs, but operate as internal crossing facilities to find natural matches among their client orders. This type of crossing is not new to many brokers, but the technology to automate it has only recently become formalised in the form of broker internalisation engines spawning greater competition between the sell side to provide this form of liquidity pool.

The buy side has expressed mixed feelings to TABB Group in research-based interviews when it comes to new trading venues. Half of our respondents saw the creation of new MTFs as positive for the overall market. Of that half, 26 percent believe that the competition will act as a catalyst that reduces prices and improves service across the entire exchange landscape. Additionally, the remaining 24 percent believed these venues would bring more liquidity to the market by making electronic access easier, which would encourage liquidity providers and increase trade sizes.

However, not everyone had such a rosy view of these new entrants. Increased fragmentation leading to less transparency is a cause for concern for many. The world has watched as the U.S. equity market fragmented to include more than 50 liquidity sources, and buy-side traders in Europe do not want similar fragmentation in Europe to result in loss of pre- and post-trade transparency and price discovery in the dark.

Despite global trends toward fragmentation through competition " including the encouragement provided by MiFID and Reg NMS " centralised trading continues to offer the benefits of improved price discovery and deeper liquidity at the risk of monopolistic practices and higher trading costs.

The increase in fragmentation will also stimulate the already-growing need for technology. Smart order routers and algorithms can help to create a virtual central order book from some liquidity sources, and provide quick access to test the liquidity depth of other liquidity pools. As the number of venues available rises, the buy side will need to be discerning with their order flow. Some will lean more heavily on their brokers; others will invest more in technology to manage the new environment. With budgets being slashed due to complex market conditions, increasing spending for trading technology " or anything, for that matter " does not sit well with the buy side.

TABB Group estimates that trading in buy side crossing networks in Europe will equate to about 1.2 billion Euros by 2010. As electronic trading continues to shrink average execution sizes in Europe, buy side traders will look to crossing networks in greater numbers to execute large block trades. While crossing networks aimed at the buy side will not supplant the established exchanges, they are part of the new competitive landscape and will certainly grow in popularity for the buy side trader who values anonymous and quick execution of block trades above all else.

Kevin McPartland is senior research analyst at TABB Group.

More Commentary
A Wild Ride Comes to an End
Covering the financial services technology space for the past 15 years has been a thrilling ride with many ups as downs.
The End of an Era: Farewell to an Icon
After more than two decades of writing for Wall Street & Technology, I am leaving the media brand. It's time to reflect on our mutual history and the road ahead.
Beyond Bitcoin: Why Counterparty Has Won Support From Overstock's Chairman
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators.
Asset Managers Set Sights on Defragmenting Back-Office Data
Defragmenting back-office data and technology will be a top focus for asset managers in 2015.
4 Mobile Security Predictions for 2015
As we look ahead, mobility is the perfect breeding ground for attacks in 2015.
Register for Wall Street & Technology Newsletters
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.