The world’s equities markets are undergoing major changes. Exchanges are demutualising, consolidating and establishing global linkages, while alternative trading platforms are emerging that claim to offer a variety of advantages, from cross-border trading to lower transaction costs. Meanwhile, software is available that provides links with multiple exchanges for electronic trading. With the recent falloff in returns, and increasing pressure for greater transparency in transaction costs, pension funds and asset managers can benefit from exploring the evolving trading environment.
The establishment of the EU and introduction of the euro has led to attempts to create single venues to trade pan-European stocks at reduced costs. Although transaction costs in domestic markets in Europe are comparable to those in the US, cross-border trading has been more expensive. But the initiatives have had limited success so far.
Morgan Stanley and Scandinavian exchange technology supplier OM Group launched Jiway to offer the electronic trading and settlement of European and US stocks. But after a shaky start, Morgan Stanley pulled out of the venture last September, leaving OM to go it alone. Recently, Jiway added Swiss Market Index products, and so now provides a single point of access to markets in France, Germany, Holland, Italy, the UK (Sets and Seaq), as well as the New York Stock Exchange (NYSE) and Nasdaq in the US.
Last year, the London-based consortium Tradepoint and the SWX Swiss Exchange merged to launch Virt-x, an online trading platform for cross-border European equities trading with a built-in central counterparty. So far its appeal has largely been for the trading of Swiss blue chips stocks, but in May Virt-x introduced exchange traded funds (ETFs), initially with 23 funds from Barclays Capital, UBS and Merrill Lynch International. Antoinette Hunziker-Ebneter, the chief executive officer of Virt-x, says: “The European market for exchange traded funds is in its infancy. However, we fully expect the demand for these products to grow rapidly and mirror the success of ETFs in the US, where they account for a significant proportion of daily traded volume.”
Meanwhile, technology-oriented exchange Nasdaq has tried to capture a slice of the cross-border market with a platform that offers a single rule book – single membership approach for pan-European trading. Last September, it formed an alliance with the Berlin Stock Exchange to bring German retail investors onto the platform.
One of the reasons for the slow growth of the pan-European exchanges is that investors are able to use a range of electronic trading packages to access multiple markets, both across Europe and in the US and Asia. Stockholm-based NeoNet, for example, provides a network that consolidates the order books on nine European exchanges, including London, Frankfurt, Paris and Virt-x, as well as Nasdaq.
“Our clients can trade directly and anonymously across all these exchanges through our exchange memberships,” says Torvald Bohlin, chief executive officer of NeoNet. The company handles all local rules and regulations of the various exchanges, simplifying global trading for the user wherever they might be, says Bohlin.
NeoNet makes use of the Financial Information Exchange (FIX) connectivity standard to link firms’ trading systems with its exchange network. While the company does offer its own trading user interface, it expects that most firms will want to take advantage of FIX to use their existing system.
“FIX is fast becoming the glue of the (equities trading) world,” says Bohlin. The standard helps firms achieve the straight-through processing (STP) of transactions, minimising manual intervention and improving efficiency and reducing costs, he says. And with its recent linkup with Nasdaq, NeoNet is also becoming an important gateway between the Europe and the US. European firms can now trade directly on Nasdaq using the same access point as for the major UK and continental exchanges, while US traders can use their NeoNet connection to access European stocks. Already, one third of NeoNet’s revenues come from the US. And by the end of 2003, the company plans to offer access to 80% of the world’s market capitalisation, says Bohlin.
Like NeoNet, Paris-based Global Trading Systems (GTS) provides technology for cross-border trading, with an emphasis on linking cash and derivatives markets. Currently, its network connects to Euronext cash, futures and options markets, as well as to Nasdaq, NYSE, American Stock Exchange (Amex) and all the US-based electronic communications networks (ECNs) such as Island and Archipelago. GTS is working on connections to the London Stock Exchange (LSE), Virt-x, Deutsche Borse, Eurex and the London International Financial Futures and Options Exchange (Liffe). Users can either connect their existing trading systems to the GTS network, or install its trading, middle and back office software. The company is also establishing a global broker network for firms that are not direct members of the various exchanges.

A number of other software suppliers also provide software that will link to global exchanges directly or through networks such as GTS and NeoNet. Frankfurt-based Realtime Systems originally developed a front office system for Eurex and has subsequently expanded it into an Internet-based real time trading application for stocks, derivatives, bonds and warrants across multiple European exchanges. In addition, users can access NYSE, Nasdaq and Amex via a link with the US broker MB Trading.
Stockholm-based Orc Software offers real time trading software for institutional and retail traders, and has interfaces with 35 exchanges covering stocks, derivatives, foreign exchange and other products. It also has partnerships that enable users of its software to access US exchanges and the Korea Stock Exchange. Other electronic equities trading software suppliers include Ex-it, FFastFill, and Beast Financial Systems.
All these electronic trading systems can be integrated with firms’ middle and back office systems to help reduce trading costs through straight-through processing. Firms have also been looking to persuade their governments to reduce taxation on trading, and the costs of regulatory reporting. “However, for institutions the really significant costs are the hidden ones, such as the market impact of large orders or the lack of liquidity for large trades,” says Alasdair Haynes, chief executive officer of London-based ITG Europe, which operates the Posit intraday equities crossing system.
Firms can input buy and sell orders by a variety of means, including telephone and electronic trading system, directly into the Posit system where they are matched at the midpoint of bid and offer prices taken from traditional exchanges. Posit currently operates six matching times during the day, and trading is anonymous and confidential so that even very large trades have “zero market impact”, says Haynes. Although the matching engine behind Posit is complex, the system is easy to use, he says.
ITG set up Posit in the US in 1988 and introduced it to the UK in 1998. It now covers 10 European markets including Finland and Norway, and has links to US, Canadian, Hong Kong and Australian markets as well. Over 170 firms currently use the system and membership and volumes are growing rapidly, claims Haynes. Revenues for ITG Europe which runs Posit grew 62% in 2001 to £11.6m.
“At times like this, people are looking at alternative ways to get better performance,” says Haynes. Conventional exchanges that host regional markets and offer price discovery and continuous trading are having to compete with new venues such as the Posit and E-crossnet crossing systems which are confidential and noncontinuous and link to multiple exchanges. “The key to success (for a market) is going to be connectivity. Firms want to be able to pick and choose venues to get best execution.”
Haynes believes political and technological factors will limit consolidation among European equities exchanges, and that alternative venues will continue to emerge and thrive if they add value to trading in some way. Equities markets across the globe are in a state of flux and are more complex than ever before. Alternative trading systems such as the pan-European exchanges, crossing systems and ECNs are bringing new competition to the markets which is of benefit to firms, and electronic trading software is enabling firms to access multiple markets via a single entry point.