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Alternative Trading Systems Are Emerging in Europe to Meet MiFID Best Execution Requirements

Europe's MiFID regulation is giving rise to alternative trading systems (ATSs) to challenge the traditional exchanges and help the buy-side achieve best execution.

"Best execution is certainly going to be more formally adopted in terms of having to have a proper execution policy, and within that policy it kind of forces you toward seeking out all relevant liquidity pools," explains Steven Way, head of European equity trading at Standard Life Investment in Edinburgh, Scotland. "Because from a regulatory point of view you're going to have to justify why you don't look at certain venues, you will see a proliferation of alternative venues selling themselves as something you need to look at."

The Time Is Right for ATSs in Europe

A combination of other market forces also is contributing to the boom in European ATSs. The spread of algorithmic trading, the U.K.'s unbundling of research payments and the adoption of the FIX protocol for electronic trading will bring more liquidity to the alternative venues. "[FIX] is key to the ATS proliferation in Europe," says Way. While FIX is well established in the U.K., it's still quite young in its role across Europe, he notes. "Without FIX connectivity and the ability to electronically handle orders, the ATS won't take off."

While ATSs have existed for nearly 20 years in Europe -- Instinet entered the market in 1988 -- so far the dream of a pan-European trading system has eluded European fund managers. Two efforts at creating a pan-European exchange didn't pan out -- eCrossnet, a buy-side-owned crossing network, was acquired by ITG about a year and a half ago, and virt-x, a pan-European exchange formed in 2001, now falls under the Swiss Exchange (SWX) Group. SWX Group took an ownership stake in virt-x but still offers trading in U.K. and European blue chips outside of Switzerland.

"Because regulations forced all the orders to go through the exchanges, there really was no need for ECN or ATS type of players," explains Sang Lee, managing partner at Aite Group in Boston. "With the advent of MiFID, that has changed drastically," he says.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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