Exponential growth in volumes and sweeping new European rules on trade transparency will force exchanges and investment banks to increase capacity, industry experts say.
The Markets in Financial Instruments Directive, or MiFID, is the European Union's attempt to overhaul the investment banking system and will require market players to post prices at which they are willing to buy and sell shares, as well as prices at which they have already dealt. As a result, algorithmic trading systems - where orders are chopped into smaller chunks according to mathematical rules to minimise a trade's impact on a stock's price - will proliferate, testing banks' and exchanges' capacity to the limit.
"It's disruptive change and it will really make it a level playing field," said Peter Bennett, an independent exchanges consultant and the founder of the Tradepoint Investment Exchange at an exchanges conference in Dubai.
"The biggest exchanges are not doing enough. There is exponential growth in black-box trading. (An increase of) two times capacity isn't enough - 50 times is enough," he added.
MiFID is due to come into force in November 2007, but some analysts reckon it may be pushed back further.
And as an increasing number of alternative trading venues will still have to report all prices, the strain on exchanges', banks' and fund managers' systems will begin to tell.
"The traders of the past used to have a choice between going to a broker on a principal basis, or just an agency but now they have a choice of whether to go to a crossing network, algorithmic trading, or multiple different destinations," Alasdair Haynes, Chief Executive of ITG Europe, a technology-based equity trading services group, said on the sidelines of the conference.
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