Exchange Independence

Over the last 100 years, exchanges have continued to provide a key service in the form of price discover, that is matching buyers and sellers and ultimately discovering the price that a trade will take place.

The price discovery process has been central to the exchange model and has remained largely unchanged until now.

Against a backdrop of constant downward pressure to minimise trading costs, a new competitor is challenging the once dominant position held by the exchanges.

New Entrants
The new entrants are in the form of Multilateral Trading Facility (or MTF), backed by large market participants. The MTFs have drastically changed the landscape introducing intense competition which has directly benefited the market in terms of :

 • Tighter bid / ask spreads
• Lower commissions
• Increased market depth and liquidity
• Average ticket sizes have fallen

MTFs continuing to take market share  – the number of MTFs have exploded from nowhere to in excess of 130 in Europe within a couple of years.

A recent Thompson Reuters pan European survey reported that the LSE has 13.5% monthly market share by turnover, compared to Chi-X which has 15.2%.

This trend of MTF taking market share at the expense of the established exchanges looks set to continue.

MTF Allegiance
The previous market structure once enjoyed by the primary listing exchanges is no longer tenable and needs to be re-examined.

One of the key areas that needs to be revised is the area of Governance

As demutualised and public owned organisations, exchanges are unable to favour specific customers or groups and have to treat all customers fairly.

A large number of the new MTFs are owned by professional trading organisations which have a vested interest to obtain the best price of their own trades, representing a significant conflict of interest that the regulators need to address.

A key question that needs to be asked is what is the true allegiance of the MTFs ?

Are they looking for the best price for the customer or alternatively to drive the bid / offer spread wide in order to achieve the best price for the own member firm. ?

In the current economic climate, the regulators continue to focus their efforts on a limited number of issues, such as insider trading, front running and flash orders and have lost the battle in maintaining the impartial price discovery process.

Conclusion
As new entrants, the MTFs have been highly successfully in leveraging both technology and process innovation to rewrite the exchange model. MTFs provide increased completion and have been highly successful in driving costs down.

With many of the larger MTFS owned by market participants, the regulators need to ensure that the price discovery process remains transparent, impartial and is not manipulated or abused by a minority for the benefit of their own trading operations.

IAN ALDERTON
Email : ian@IanAlderton.com
Tel : +44 (0) 7702 777770

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