Electronic trading comes of age
Hyped as the solution to all trading problems during the dotcom boom, electronic trading platforms appeared at a startling rate. At one point over 160 fixed income trading platforms alone had been announced. But with the bursting of the dotcom bubble came a realisation about what electronic trading can and can’t offer. Since then there has been a massive rationalisation, where only those platforms that have achieved economies of scale or offer real added value to the trading process have survived.
In equities, Europe saw a rash of new venues promising either cross-border trading or some specialist service or products. Some of the more grandiose efforts, such as the Jiway cross-border platform proposed by Morgan Stanley and OM Group, have failed, while a number of the niche projects have survived. Virt-x, a cross-border exchange joint venture set up by London-based Tradepoint backed by a consortium of banks and securities houses and the Swiss stock exchange SWX was taken over by SWX in February after failing to meet its target of 10% of European blue chip trade volume.
The main problem that the cross-border projects have run up against is the “stickiness” of liquidity, says Gregor Pozniak, deputy secretary general of the Brussels-based Federation of European Securities Exchanges. “The fact that Virt-x found it difficult to gather liquidity is proof of the old saying that liquidity is sticky - both in the sense that it is cohesive and sticks together, and that it is adhesive and sticks in one place,” he says.
SWX is continuing to operate Virt-x with the support major banks like UBS Warburg and Credit Suisse First Boston but a question mark hangs over its long term future. Alasdair Haynes, chief executive officer of ITG Europe which operates the rival Posit equities crossing network, believes that the demand for a pan-European trading platform has been exaggerated. “A single cross-border platform is not a sufficient reason to justify a new exchange because technology allows you to do that already. From a single terminal you can already get direct access to Euronext, London, Frankfurt and so on.”
A number of software suppliers have created applications that link to exchanges across Europe, as well as many exchanges in the US and Asia, from a single terminal. Companies such as TradingScreen, Realtime Systems, Orc Software and NeoNet provide technology and often agency brokerage that enables investors to access many markets from one system, effectively creating virtual pan-European or even global exchanges. Meanwhile, crossing networks like Posit and E-Crossnet have established niches for themselves in the market through offering anonymous and confidential trading of large orders, so avoiding any market impact, as well as offering efficient electronic trading systems.
The biggest cull of electronic trading platforms has taken place in fixed income, where a large proportion of the proposed 160 venues never even got beyond the drawing board. Meanwhile, those early into the market, or which have captured liquidity through the services they offer or through the backing of powerful market participants, have grown and established themselves as viable alternatives to traditional trading processes.
In Europe, London-based Euro MTS has captured significant volumes of pan-European benchmark government and non-government securities. Other major platforms include Bloomberg, BrokerTec (recently acquired by major London-based broker ICAP and is being integrated with its voice broking activities), eSpeed (the electronic trading arm of New York-based major broker Cantor Fitzgerald) and Instinet Fixed Income Markets (the fixed income arm of the Instinet global agency securities broker, a Reuters’ affiliate).
Electronic trading in foreign exchange has also seen its casualties over the past 18 months. Last year, independent online forex platform Atriax shut down after failing to win liquidity in a fierce battle with rivals FX Connect, part of Boston-based financial services giant State Street, independent platform Currenex and bank-backed portal FXall. Recent industry estimates still put FX Connect as the market leader with an estimated volume of $9-$10bn (E000bn) in daily trades, but FXall is moving up fast, announcing in January that it too has crossed the $9bn a day barrier, with chief executive officer Phil Weisberg promising further growth and making sure that the FXall platform “is easily accessible to all market participants”.
Access is a major issue with electronic trading. Because there are few standards for interfacing with online platforms, organisations have to buy or develop new software if their the platform does not offer a link to their current order management system. As a result, a group of forex trading participants have begun to develop industry standards that should make it easier, cheaper and less risky for organisations to connect to the trading platforms. Treasury Workstation Integration Standards Team (Twist) is a not-for-profit industry group that includes buy side firms, banks, trading systems suppliers and others, and is creating interfaces that will enable any trading application to connect to any platform that conforms to the standards. The group is now looking to extend its standards to fixed income derivatives and possibly other asset classes, says Tom Buschman, coordinator of Twist.