BATS, Chi-X see 4-5 main pan-Europe markets

LONDON Wed Mar 31, 2010 1:52pm EDT

LONDON (Reuters) - Four or five pan-European market centers will dominate share trading in five years' time, emerging from the dozens of exchanges and trading platforms now in competition, the heads of two leading trading platforms said.

Chief executives of both Chi-X Europe and BATS Europe, the region's two largest alternative electronic platforms, gave remarkably similar forecasts at the Reuters Exchanges and Trading Summit on Wednesday.

"There will only be four, five pan-European players. The market is going to be pan-European, and the interest in national markets will start to slow down," Alasdair Haynes, Chi-X Europe chief executive, said at the Summit in Reuters' London office.

Chi-X Europe and BATS are among new low-cost platforms known as multilateral trading facilities (MTFs), which have taken market share from exchanges since the European Union's markets in securities instruments directive (MiFID) paved the way for greater competition in late 2007.

"The dominant market centers of the future could be MTFs that are converted to exchange status or exchanges operating in MTF mode," BATS Europe Chief Executive Mark Hemsley said.

"It will become increasingly harder and harder for smaller exchanges with high fixed costs to compete with more efficient pan-European market centers," he added.

Chi-X, which celebrated its third anniversary on Monday, ranked as the third-largest of Europe's 46 trading venues with a 14.1 percent share of trading in March, according to Thomson Reuters data. It recently claimed to be the first European MTF to become profitable on a daily basis.

BATS ranked as the eighth-largest market and the second-largest MTF with 4.2 percent, 17 months after its launch. It is on target to break even in the first quarter of 2011, in line with its pre-launch business plan, Hemsley said.

EUROPE VS U.S.

The MTF heads and London Stock Exchange (LSE.L) Chief Executive Xavier Rolet all said the ultimate aim of increased competition is to encourage more share trading in Europe.

"Europe represents about 31 percent of the world's GDP and the United States about 27 percent," Rolet said at the Summit earlier in the week. "Europe trades $25 billion a day of equities, the United States $300 billion."

The overall cost of transactions including clearing, settlement and other areas are the main obstacle, they agreed.

Investors have said that while MiFID has brought down costs per trade, overall costs have not fallen because of smaller average transaction sizes and the indirect expense of coping with complex, fragmented markets.

Haynes said Europe's post-MiFID market structure is still evolving.

It is now entering a second phase, in which "some (venues) will win, some will get taken over, some will die," he said. "You don't see the benefits of competition at that point."

Hemsley expects to see little in the way of mergers and acquisitions for the smaller, unprofitable MTFs.

"You will see some fold and others run on a loss-making basis and be niche platforms," he said.

Neither Chi-X nor BATS expects to acquire other MTFs.

"We have not identified a need to make acquisitions. What's worked so far is to develop the business based on the technology we've got," Hemsley said at the Summit.

Haynes said the shakedown will lead to a third and final stage with a smaller number of efficient, sophisticated players.

"The industry will have shaken itself out, and you start to create the market for the future," with lower operating, data and post-trade costs, he said.

The benefits to the end investor should start to arise within two or three years, and benefits to corporate issuers may follow, Haynes predicted.

"If we raise the value of equity turnover, just if we double it from where we are today, then ... you will reduce the cost of capital for issuers because you have a more efficient marketplace," he said.

(Reporting by Jane Baird, Editing by Erica Billingham and Elaine Hardcastle)