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Chats or BIX Europe - the shape of things to come?

Few can have missed the reports that BATS Global Markets is believed to be in negotiations to buy Chi-X Europe. There is a certain logic for closer ties between the two as they both share a number of the same owners. The timing may also be significant as the fall-off in European volume will have affected the alternative venues far more (they typically run at around breakeven and so are more sensitive to overall declines in market volume).

On the other hand, BATS and Chi-X were responsible for matching over 36% of the FTSE 100 last week (excluding non-lit trading such as OTC Dark Pools and SI). This would represent a sizeable pool of liquidity with which to continue the battle with the LSE. A combined entity would also have nearly 30% of the CAC 40 and DAX, too. With this sort of market share - and assuming it maintained its low cost base - the combined entity would surely have "crossed the chasm" into profitability and sustainability. It would also help cement Chi-X's claim to be the "largest pan-European equities exchange".

As the LSE, Deutsche Börse and NYSE Euronext continue to prepare for greater competition between themselves, they too may be dragged into bidding for Chi-X and BATS. Were this to happen, we would almost be back to square one in the merry MiFID game because they would then have bought back nearly all the liquidity that their members had siphoned away onto alternative platforms.

Meanwhile, I am in Tokyo this week debating the future of fragmentation here since last month's launch of Chi-X Japan (incidentally owned by Chi-X Global not Chi-X Europe). Obviously it's very early days and there are still some regulatory obstacles to overcome before the playing field is level (such as allowing the PTSs the same short selling privileges that the Tokyo Stock Exchange enjoys). Nevertheless, interest in what Chi-X Japan and others (including SBI Japannext and are doing is huge and we are already seeing a number of brokerage firms claiming significant price improvements by utilising SOR technology.

Unlike Europe there is no MiFID-style mandate for best execution in that region and so market forces will be free to shape the relationship between the sell-side and the buy-side. Many market participants, however, are looking to leverage their technology investment in fragmentation from other geographies here too. It will be interesting to see how quickly these fragmentation tools are deployed in Japan (and the rest of Asia) and compare what happens with other countries around the world.


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