The research note says that in a typical high- or low-volume trading scenario, Chi-X Europe charged a fifth of what the London Stock Exchange (LSE) charged for the same volume of trades and a tenth of the charges levied by Deutsche Börse and Nyse Euronext.

The lower charges have resulted in MTFs eroding the traditional exchanges' market share of equities trading volumes.

TowerGroup predicts the new competitors will continue to eat into the market share of incumbents as their lower transaction costs and increasing concentration of liquidity become more apparent.

Bob McDowall, European research director at TowerGroup, says: "The new MTFs have an opportunity to take considerable market share from the traditional exchanges. Their opportunity is heightened as organisations look to cut costs under current economic pressures. The traditional exchanges need to look at their business plans very carefully and evolve accordingly in order to survive."

TowerGroup predicts the proliferation of trading venues in Europe will lead to short-term fragmentation of liquidity before eventual market consolidation and reaggregation. Within the next five years, TowerGroup expects to see no more than eight to ten alternative venues, though more realistically as few as five. Traditional exchanges will gradually transform and become lower-cost providers to compete with the MTFs, either through organic growth or acquisition.

In the US markets, where changes in regulation and technology have had more time to take hold, a new breed of electronic exchanges such as Nasdaq MC, Nyse ArcaEx, Bats Trading, and Direct Edge, among others, have steadily gained market share, and today comprise over 53% of share volume. An analysis by Celent expects the trend to continue with electronic order books growing to represent 65% of total US share volume by 2012.

Across the border in Canada, a similar shift is being played out, with Chi-X Canada claiming that participants trading on its platform achieved an average 2.55 bps of price improvement in January 2009. Chi-X's pricing is set to get even more competitive in March, when the market centre intorduces a new "X Factor" pricing plan, under which providers of liquidity to Chi-X Canada will be rebated $.0033 per share and takers of liquidity will be charged $.0028 per share. The new rates will be in effect for the entire month or until Chi-X Canada volume for March reaches 250 million shares.

Tal Cohen, CEO of Chi-X Canada, comments: "Globally we have seen competition from alternative trading venues tighten spreads and increase liquidity. As January's figures indicated, those benefits are now evident in Canada, with early adopters of Chi-X Canada rewarded with savings of over $700,000."