The London Stock Exchange is facing competition from a wave of new stock exchanges -- will this mean lower costs for investors?
Until recently, many stock exchanges had an effective monopoly on share trading, but now they're coming under attack from newer and leaner upstarts.
Since November of last year, the European Union's 'Markets in Financial Instruments Directive' (MiFID) has made it easier for new entrants to compete. In parallel with this, faster computing and improved software have made it possible for new businesses to provide efficient services across multiple countries.
In a very short space of time, the barrier to entry have fallen, and with them the share prices of the incumbent exchanges. The London Stock Exchange (LSE: LSE) has seen its shares fall by 60% from their peak in January, despite robust volume and revenue figures, while Deutsche Boerse (XETRA:DB1) is down by 50%.
The main new challenger so far is Chi-X, whose website today claims a 22% market share of the trading in FTSE 100 companies. Owned by broker Instinet, with the involvement of several major banks, Chi-X reportedly has only 26 staff. LSE has 1,200, but it must be remembered that this is spread over a much broader range of businesses.
Turquoise is also expected to be a significant player, having just started full operations on Monday. Owned on a mutual basis by nine investment banks, it will trade all the main European shares. The company's CEO told the Times that they are confident of beating their target of 5% market share by Christmas. Considering that the banks that own it are also responsible for a large proportion of the equity trading in Europe, that confidence should be justified. Effectively, the bankers are doing it for themselves.
Plus Markets (LSE: PMK) and Virt-X also provide markets for the major shares, while ShareMARK is focused on smaller companies.
Nasdaq OMX Europe, is scheduled to start trading here this month, while another American house, BATS, is expected to open its doors in London in November. It claims to have a 10% market share for NYSE-listed stocks, and is targeting 15-20% share of FTSE 100 trades by the end of 2009. Continental operators Burgundy and Equiduct may come in future.
In response to all this, the LSE, Deutsche Boerse, and Euronext have cut their fees and are working to improve transaction times. Much of the growth in volumes is driven by 'algorithmic traders', typically hedge funds, which execute vast numbers of trades at tiny margins. For them, every penny and millisecond is important.
Just a few years ago, the LSE was able to hike its charges by 70%; now they are cutting in response to competition that didn't exist then. Even if the total volume of trading continues to increase, it will be interesting to see how the LSE can defend its moat, and the chunky margins that moat enabled in the past.
MiFID requires institutions to provide the 'best execution' for their clients, so this increased competition should eventually benefit the private investor too.
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