The new year is shaping up to be the one in which multilateral trading facilities and real competition between execution venues finally take off in Europe. Advances in technology and a favourable regulatory regime make it much easier today for new execution venues to win business from incumbent exchanges than ever before.
One likely consequence, apart from lower margins at exchanges, looks set to be a further concentration of institutional business in the hands of the largest brokerage houses. Although the nine leading investment banks behind the planned Turquoise MTF already claim about 50% of the trading volume in Europe, that figure is only likely to increase as liquidity fragments and scatters across multiple venues.
The reason for this is the level of investment in technology required to compete in the execution business in an unbundled and more complicated trading world. Even many of the largest asset managers baulk at the idea of matching the many millions of dollars that the top brokerage houses have spent on trading technology. Smaller brokers simply cannot afford to stay in the game unless they have particularly strong niche in, say, research or small-cap stocks. The technological arms race that characterizes the institutional brokerage business in the US is coming to Europe.