New EU securities rules offer upstart platforms the best opportunity yet to wrest trading volumes from established stock exchanges after a string of past failures, cutting costs for investors in the process.
The pressure to generate returns has never been greater for the big bourses now many have dropped mutual status to become profit-oriented companies, such as the London Stock Exchange, NYSE-Euronext and Deutsche Boerse, and any loss of trading volume is an assault on their profit.
They have seen off a rash of upstarts in recent years, from Tradepoint and virt-x's non-Swiss trading efforts to Nasdaq Europe and Jiway.
This time it won't be so easy, as the Markets in Financial Instruments Directive (MiFID) takes effect on November 1 to sweep away barriers to competition in share trading and create a single financial market in the 27-nation European Union.
A rule that says all share orders must go through an exchange will be scrapped, which will mark a substantial change for countries like Spain, Italy and France that enforced it.
At the same time, banks and new alternative trading platforms can compete directly with bourses anywhere. At a stroke, some of the structural advantages of the exchanges will be swept away.
"One needs to be careful about assuming liquidity has always been in a certain market and it will always be there," said Anthony Belchambers, chairman of industry lobby MiFID Connect, who noted a greater determination in top market participants to overturn the status quo.
Several of them are building a European trading platform, called Project Turquoise, to bypass the exchanges, though it won't be up and running in November when MiFID comes into force.
Sceptics say Turquoise is simply a big stick with which to beat lower fees out of the exchanges, and the threat is already having that effect, but a Turquoise source insisted there was substance behind the threat. "We will probably go live in the first quarter of next year. We are absolutely serious. We have seen before that the threat of competition alone does not bring prices down for a long period of time," the source said.
As part of its sales pitch, it will forward orders to other platforms if they offer better prices, something no bourse will do. A more streamlined network of clearing and settlement systems, smart order routing technology to hunt down the best share prices across venues, and an obligation under MiFID to ensure clients get a fair deal will also help new entrants.
"If ever the planets are aligned, it is now. It's a slow burn, but come next year we will start to see the reality of what competition really means," the Turquoise source said, pointing to rival Chi-x as an example of things to come. Launched by broker Instinet under a year ago, Chi-x already offers trading in all Dutch, British and German blue chips.
In July, 61 percent of its trades were within the bid-offer spread available on central exchanges and improved on exchange prices by an average of 1.9 basis points, the company said.
It accounted for 6.2 percent of trading volumes in German engineer Siemens in the week commencing July 16 when trading on Chi-x totalled 1.4 billion euros, though still a tiny fraction of the European market overall. In response to the tighter margins that competition will bring, however, the leading exchanges are looking to mergers to maintain their volumes.
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