Lee Hogkinson, CEO of virt-x says Europe's incumbent exchanges are about to enter a 'perfect storm' of new competition driven by powerful forces of deregulation and tremendous advances in the speed and intelligence of trading technology.
Speaking to a crowded room of 200+ delegates at Finexpo, Finextra's annual capital markets conference and exhibition in London, Hodgkinson expressed the view that the European markets are "at the start of a fundamental and long-lasting change of a magnitude never before seen in our industry".
The beginning of this process can already be seen by the imminent arrival of a host of new competitors, such as Instinet Chi-X, Turquoise and Nyfix, the diminishing dependence of the buy-side on the sell-side for order execution, and the gradual seeping of transparent order flow into dark pools of liquidity.
The introduction of MiFID combined with advances in smart order routing technology have buried forever the notion that long-standing incumbents have "any divine right to liquidity" Hogkinson notes. To compete in the emerging landscape, exchange execution venues will have to offer better value for money, he says, and strive for constant innovation by utilising technology that is big, fast and cheap.
Virt-x itself has already embarked on a three year infrastructure upgrade programme intended to cater for increased demand for direct market access (DMA) and algorithmic trading. The exchange is tapping outside suppliers for the rebuild and is also working with third party newcomers such as Nyfix to provide a dark pool platform for block trading of Swiss blue chips. "We have to accept that not all transactions are suited to the public limit order book," he says.
The importance of smart order routing technology in tapping liquidity in a fragmenting market was emphasised by George Andreadis, head of AES liquidity strategy for Europe with Credit Suisse. The broker is currently using dynamic order placement alongside intelligent liquidity sourcing to generate significantly improved returns for its clients, he states. By switching trades across execution venues, Credit Suisse is seeing average improved margins of two basis points rising to a maximum nine basis points.
"Clients can get real basis point improvements when trading away from the main exchange," he says. "That's why the new exchanges can't be ignored."