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Can the new trading venues survive?

I was interested to see that Chi-X have announced good profits and this set me thinking about how they will fare in the next year, as all the other new trading venues come in. So far Chi-X has had it their own way so far but surely times will become tougher with greater competition.

Virtually all MTFs offer broadly similar services and all tend to promote the speed of their system as a selling point. However, the speed issue is the least reason why anyone would use one system over another. It reminds me of the old joke about electricity companies selling the speed of delivery as a benefit. ‘It's bloody fast and always there when you need it!'

Assuming the speed of light is the end benchmark that all the geeks are aiming for how important is speed?

In volatile markets speed can be a real risk if sale orders are executed when the real opportunity is to buy. Algorithmic trading has enormous values but can never replace the human brain in assessing the overall direction of the market and the gut feel that sets good traders apart from great ones.   

All the MTFs have very similar clearing capabilities with Equiduct probably the standout with a great deal more flexibility for the user. Some might say this is a weakness but in my view it is a great strength.

The Stock Exchanges are all able to compete with MTFs on speed but also have the important ingredient of history and power behind them and they are not going to role over and let their business drip away.

One MTF executive told me when I questioned them on the differences between MTFs, the competition and their survival chances that they expected to be bought by another MTF or more likely a Stock Exchange before liquidity and costs come into it. So is it just a game of setting up a business and system for ex millions only to sell for a profit as soon as possible. Perhaps that is where the real difference lays, the price of exit!

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Comments: (2)

A Finextra member
A Finextra member 23 October, 2008, 16:32Be the first to give this comment the thumbs up 0 likes

End-to-end speed is the real challenge to both platform providers like Trayport and those developing markets like MTFs. Faster transaction speeds can only be obtained if we can create an architecture that covers all points in the data distribution chain.

MTFs all promote their fast trading systems as a competitive advantage, but it should be considered that the overall speed gained is not necessarily solely dependent on developing faster trading platforms and is not the only way MTFs can differentiate themselves or indeed ensure survival. System availability, reliability and attracting liquidity to the markets may instead ultimately prove to be the key deciders for the market success of MTFs - areas where technology plays a role above and beyond pure speed of a transaction. 

Liquidity has already started to fragment with the rise of different MTFs leading to market participants changing their execution strategies in the face of this fragmented marketplace. To facilitate this, technology is quickly becoming the enabler and differentiator through other means than simply speed.

A Finextra member
A Finextra member 23 October, 2008, 16:57Be the first to give this comment the thumbs up 0 likes

Thank you for your comment Marcel

Speed is important but accuracy and completeness must be included or speed becomes risk.

I agree the real test is the liquidity within the market. In the past this has remained with the Stock Exchanges but we are all now in a new ball game. The Chi -X results indicates willingness for liquidity to move and flow away from the exchanges. Only time will tell if any MTF or Exchange can retain their liquidity when all are running live

I suspect we will see a kind of boom and bust with some surviving while others merge of get bought

 

Gary Wright

Gary Wright

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BISS Research

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