In the wake of the announced merger between two of the largest ECNs - Archipelago and Redibook - TowerGroup predicts further significant shifts in the structure of the electronic equity markets.

"The decline in trading volumes over the last several quarters, combined with the rapid proliferation and subsequent contraction of electronic trading systems, is forcing all electronic systems to look at creative ways to bolster liquidity - with mergers and acquisitions being chief among them," says Robert Hegarty, research director for investment management at TowerGroup.

The research suggests that as alternative pools of liquidity become greater and decimalisation reduces the liquidity provided by market makers, the likelihood of executing on SuperMontage will become smaller, since investors will be attracted to the largest pool of liquidity.

Commenting on the merger, TowerGroup notes that in the coming months, the Redi platform is likely to be the primary Nasdaq matching mechanism, while in turn the ArcaEx platform will be used primarily for matching exchange listed stocks. Higher profits will be achieved through the elimination of redundancies, largely in duplicative connectivity and operations; more extensive internalisation (shares crossed within the system, as opposed to more expensive external routing); and increased market data revenues.

Goldman Sachs will become the largest stakeholder in the new entity, combining its 12% stake in Archipelago with an estimated 15-18% stake in RediBook (via its Spear, Leeds, Kellogg acquisition), predicts TowerGroup.

For the first time since the creation of ECNs in 1996, the merger brings competition within striking distance of Instinet, which has been steadily losing market share over the last five years, concludes the report.