London Calling – 26 November 2009
First Published Friday, 27th November 2009 03:06 pm from Fidessa : Fidessa
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target="_blank">LSE's first half results this week.
Most of the comment seems to focus on the erosion of its market
share by the MTFs and whether the pricing of the MTFs is
sustainable in the long term. Whilst there is little doubt that
these are both valid areas for discussion, I wonder whether there
are some more subtle issues involved.
it's not just about pricing per se
but about pricing models. The MTFs have adopted maker/taker
models that reward those traders posting liquidity on their
platforms whilst charging those who remove it. This favours the
Electronic Liquidity Providers at the expense of the large banks
and brokers which generally prefer a wholesale discount pricing
structure. The LSE has switched between both pricing models and,
to date, neither approach seems to have stopped its market share
from declining. Ironically, though, this is where the LSE (and
other primaries) may have an advantage. This is because they can
use the various MTFs they have built (or acquired) to separately
meet the needs of these different market segments. In this way,
they can create a range of sub-brands that can experiment
simultaneously with different pricing/delivery models (how about
trading FTSE 100 stocks in Euros, for example?). And, just like
the high street supermarkets, shoppers benefit from the economies
of scale regardless of whether they buy premium, regular or
budget priced products.
Another point that
maybe needs more emphasis concerns exactly who the enemy is.
Maybe the real challenge for the LSE is less about protecting its
UK market share from "troublesome MTFs" and more about
establishing the LSE Group as a genuine European/global
supermarket for stock and other financial instrument trading.
Deutsche Börse's creation of its international market (XIM)
demonstrates where its own thinking is heading in this regard
and, of course, NYSE Euronext has always made a big play about
its pan-global, multi-asset credentials. The LSE, however, has a
number of situational advantages in this battle, too - not least
of which is the fact that London is generally seen as the
financial trading capital of Europe. In addition, it has its
acquisition of Borsa Italiana and its Canadian and Japanese
connections to play on.
The MTFs face a
similar dilemma. Is the enemy the primary exchanges or should
they be vying instead to establish themselves as best alternative
trading venue for Europe? Breathing down their necks are the ELPs
and other market makers who have realised that, in the post-MiFID
world, maybe they don't need venues at all and can instead
interact with order flow directly.
folks in Brussels start writing the script for MiFID 2
"where we went wrong and what we intend to do about
it", it looks like there is some doubt over what the
right shaped entity for pan-European equities trading really is.
Maybe the answer lies in the old axiom - keep your friends close
and your enemies closer still.