European Equity Market Structure:
Liquidity, Trust and Competition
Executive Summary Large scale change is occurring at a rapid rate across the European equity markets as the Markets in Financial Instruments Directive (MiFID) has blown the door to competition off its hinges. Eighteen multi-lateral trading facilities (MTFs) will be up and running by the end of 2008, providing a level of competition not seen to date in Europe. Changes in regulation, market structure, technology and cost are combining to change the way liquidity is formed, what execution venues look like, and the tools that participants need to access the market.
A new age of competition has arrived, supported by changes in the regulatory environment, member support behind rival trading venues, and changes in the economics of trading. As the national silos give way to a more horizontal pan-European marketplace, liquidity will fragment amongst the plethora of dark and lit pools that are being launched. The new MTFs vary in terms of ownership structures and target audience, and they will seek to quickly grow market share, variously offering liquidity, cost, speed and innovation.
Exchanges are having to adapt and are deploying different tactics to defend and grow market share. As they seek to maintain their positions of strength, they will increasingly adopt the traits of their competitors in terms of technology, access, fee structure, and trading functions. Two exchanges are launching MTFs that compete directly in the pan-European space, choosing to compete with their own exchanges in order to offer pan-European trading capabilities. Others are launching dark pools or waiting to see how the landscape plays out.
New pricing models, dark liquidity pools and technology will drive changes in the trading behaviour of market participants. As liquidity fragments, trading will become more complex, requiring major investments in execution management capabilities, primarily by sell-side brokers looking to position themselves as the gateways to execution. But the buy side must equally adjust to the changing environment as it faces an uneasy choice between the costly dependency on broker services and a major investment in technology to take more control of execution.
Competitors will overlap as the exchanges launch dark pools, MTFs target buy-and sell-side participants, and liquidity aggregators offer electronic trading services that resemble agency trading. The rush of competition to Europe is going to result in the marketplace becoming very crowded very quickly. Amongst the MTFs, those with initial liquidity, innovative functionality and the ability to segment well the order flow they covet will fare best in a market where commercial forces will weed out the weak. Reflecting the diversity that spans Europe, the rate of adoption of change will have many speed gears. Not everybody will win in a more integrated and commoditised environment, but competition has arrived and the transformation is underway.
The TABB Group Report Europe Equity Market Structure:
Liquidity, Trust and Competition
This TABB Group industry benchmark study looks at how MiFID is enabling change in the European equity markets and the impact on venues and participants in a changing marketplace. It looks at how liquidity is formed and segmented, the ramifications of a more complex trading environment, and examines what the eventual landscape will look like.