New trading platforms challenge LSE

LONDON (Reuters) - Faster and cheaper new trading platforms are starting to erode the London Stock Exchange's (LSE.L) position as the trading powerhouse of Britain, speakers at the Reuters Exchanges and Trading Summit said this week.

New European regulations and rising discontent among investors and hedge funds with traditional stock exchanges -- such as the LSE whose history goes back to the 17th century -- have led to a new generation of alternative trading platforms.

"Clearly, what we can see is the LSE monopoly crumbling before our eyes," Simon Brickles, chief executive of smaller-cap stock exchange PLUS Market Group (PMK.L), told the summit.

In Britain, Chi-X Europe gained about 10 percent of the daily total volume of trading of FTSE blue chips in its first year. It hopes for a 25 percent trading share of London blue chips in a year's time.

Turquoise, a pan-European share-trading venture backed by nine investment banks and due to launch later this year, expects European exchanges to lose almost half of their market share in trading in a year's time. They currently have between 85 and 95 percent market share.

The LSE will feel the loss acutely when Turquoise goes live, as the seven major sell-side houses among its backers will take their business away from the LSE, said John Barker, managing director of electronic platform Liquidnet.

"When it comes to competition for trading, there's an inordinate amount of bluster relating to market share, which is invariably selective," the LSE said in a statement.

So far this year, the average daily number of electronic equity trades on the LSE has been over 1 million, an increase of 43 per cent on the first four months of 2007, it added.

"We don't see competition as a zero sum game and we believe it can, and should, stimulate the creation of new liquidity."

Trading startups say they charge less than the LSE for trading and market data and have a clearer and more flexible fee structure.

"To translate Linear B back into some form of demotic Greek is probably easier than trying to understand the LSE's pricing model," quipped Peter Randall, CEO of alternative equity trading platform Chi-X Europe.

The startups can charge less because they have a smaller cost base due to more efficient technology and fewer staff.

"All exchanges, in the old days, built their algorithms to almost mirror what used to happen on the floor of the stock exchange," Randall said.

When the exchanges computerized trading about 25 years ago, "they effectively computerized their rule book ... which deals with face-to-face transactions".

"Starting with a blank sheet of paper, we said that the key is not in the face-to-face (domain); the key is getting the messages in very quickly and out again very quickly," he said.

Chi-X Europe has the capacity for 30,000 transactions a second and could increase that to 100,000.

But speakers at the Reuters summit agreed the top incumbent bourses in Europe would survive if they adapted.

"The LSE is not going to go away. It's got some issues to face but it's got the balance sheet, the tradition and the history," said Liquidnet's Barker.

Traditional exchanges would have to change their cost base, create more attractive products and invest in the upkeep of rapidly changing technology, Richard Evans, global head of electronic execution at Citigroup (C.N), said.

"They have been the bedrock of capital markets. They've provided a very valuable service, they've done a great job in many cases upkeeping their beautiful buildings and they are national icons," said Turquoise Chief Executive Eli Lederman.

"But they also have to change, they have to evolve quickly."

(Additional reporting by Richard Barley; editing by Sue Thomas)