Across asset classes, the environment for trading is changing as the internet opens up the possibility of new venues for dealing and new channels for investors to access markets. With equities, the focus is on new exchanges and other mechanisms for cross-border trading, while in the bond, foreign exchange and derivatives markets a host of electronic platforms is emerging to complement or replace voice broking and over-the-counter dealing.
The most dramatic change in equities has been the rise of electronic communication networks (ECNs) in the US. Offering lower transaction costs and narrower spreads, the ECNs provide an alternative route from conventional broker-dealers to the Nasdaq market and now handle nearly 40% of its volumes. Instinet and Island are the dominant players, with smaller shares taken by Bloomberg Tradebook, Archipelago, BRUT and RediBook.
Because the European markets are fundamentally different to Nasdaq, the ECN revolution has not been repeated here. “The European_exchanges are crossing networks and are in effect ECNs, so they offer very little market space for someone to come along and offer yet another crossing network,” says John Spencer, head of global equities strategy at Instinet. The issues of transaction costs and the wide spreads on Nasdaq that the ECNs exploited in the US simply don’t exist.
But that doesn’t mean that the markets are static in Europe. Although an attempted merger between the London Stock Exchanges and the Deutsche Börse failed, other alliances have been more successful and there is considerable jockeying for position as the exchanges begin to compete for the rapidly growing cross-border trading volumes. Most recently, the London-based pan-European electronic exchange Tradepoint merged with SWX Swiss Exchange to create a new platform called Virt-X, which plans to go live in June. It will compete with Euronext, the entity that arose from the merger of the Amsterdam, Brussels and Paris stock exchanges, as well as with the Brussels-based pan-European electronic exchange Easdaq.
Then there is transatlantic trading, where European institutions want to trade US stocks and US institutions want to trade European stocks. This is where the US ECNs believe they might make inroads into Europe and the major players are already implementing the first elements of their strategies in this regard. Because it was expecting to launch an IPO at the time of writing, Instinet would not give details of
its European expansion plans. Bloomberg’s goal is to offer a single platform for global equities trading, says Dave Martin, director of international business for Bloomberg Tradebook. In September last year, it launched a service for trading in 15 international markets, including exchanges in Italy, Spain and the Netherlands, and eventually aims to offer links to 65 international markets.
The traditionally conservative fixed income markets now have a raft of alternative electronic trading platforms. One of the first to set up shop was EuroMTS, which began wholesale trading of euro-denominated government bonds in 1999. Although based on the MTS platform for the Italian fixed income market, EuroMTS is based in London and has a membership of around 50 major European and US securities dealers and banks, including JP Morgan, Banca di Roma, Commerzbank and ABN Amro. It is a quote-driven system with anonymous trading and after-trade counterparty identification. More recently, the organisation launched EuroCredit MTS focused on the trading of covered bonds, in particular the Pfandbriefe and Obligations Foncières.
It has used its early entrance to establish a strong position, trading over e8bn worth of deals on some days. EuroMTS claims to have around 40% of total turnover of bond trading in Europe. But the company cannot afford to rest on its laurels in the face of emerging platforms, several of which have powerful backing, says Mario Spongano, recently appointed EuroMTS deputy chief executive officer.
Among the platforms that went live last year are Brokertec, Coredeal, Bond Connect and Bond Click. They differ in ownership, liquidity and trading process. Brokertec Global, for example, is the product of an institutional consortium that includes Credit Suisse First Boston, Goldman Sachs, Lehman Brothers, Morgan Stanley Dean Witter and Salomon Smith Barney. It matches bids and offers electronically and anonymously for fixed income securities and derivatives and the company recently added a facility for trading repo online. Lee Olesky, president and chief executive officer of BrokerTec Europe, repeats the mantra of many of the new platforms when he says, “Low cost and efficient access to liquidity will be the key to our success.”
Coredeal, which launched last June and is backed by the International Securities Market Assocation (ISMA) and 13 institutions, has made a slow start. Among the new competition it faces is Bond Connect, set up by State Street Bank, which boasts an intelligent matching engine and an indication-of-interest facility, and BondClick, set up by six European banks and broker dealers, including Italian dealing house Caboto and Barclays Bank, to trade European government bonds. There are also a number of proprietary bank bond trading platforms, such as Deutsche Bank’s Autobahn, which has taken a large share of the Pfandbrief market.
With the daily turnover in the foreign exchange markets estimated to be around $1.5trn (e1.6trn), the potential for trading on internet platforms is huge. However, FX has been one of the slowest markets to move to new mechanisms for trading, partly because most FX trading has been electronic for some time, using mostly the Reuters 2000 and EBS systems. But a number of internet platforms are already up and running and new initiatives are due to go live within months.
As in other asset classes, the internet throws open the doors to the market. Although initially perceived as a threat, the major FX broker-dealers are beginning to realise that the technology will enable them to offer better trading services to their clients, as well as to achieve greater efficiency and lower costs in the processing of transactions.
Among the FX platforms that have gone live are CFOWeb, Currenex, Gain Capital, Hotspot FX and Volbroker. The platforms are attempting to distinguish themselves in terms of their backing and the liquidity this promises, their technology and the nature of their market – whether it is anonymous, includes settlement and so on.
Two platforms due to go live this year are likely to have a big impact on the market because they are backed by major players. Atriax is due to launch in the second quarter and has the support of 60 banks, including Citibank, Chase Manhattan and Deutsche Bank. It is also backed by Reuters, which is providing market data and news, and is using technology developed by Integral Development, which is behind CFOWeb. Going head-to-head with Atriax will be FXall, due to launch in March, backed by over 30 institutions, around half of which are also backing Atriax. Competing against these will also be Hotspot FX, newly launched and offering auction style trading.
Despite this proliferation of platforms, Boston-based research organisation Celent forecasts that it will take until 2004 before internet-based FX trading grows from its current 5% percent of the market to 50%. The new platforms will “forever change the foreign exchange market and will eventually lead to a truly transparent, liquid market,” says Celent analyst Fritz McCormick.
Although most of the derivatives exchanges outside of Chicago are now electronic, the over-the-counter derivatives markets have been slower to move to new technology. However, this is changing fast, with a number of platforms now live or in the late stages of preparation.
North Carolina-based Blackbird was one of the first into the swaps market, and now handles interbank trading in euro and sterling as well as dollar swaps. Although it is installed in over 80 US and European banks and dealers, it faces emerging competition from SwapsWire, set up last year by 10 major dealers, as well as the platforms of leading broker-dealers Garban Intercapital and Cantor Fitzgerald. Supporting electronic OTC trading is SwapClear, a netting and clearing facility set up by the London Clearing House in which it acts as central counterparty.
In the rapidly expanding credit derivatives markets, there is vigorous competition between New York-based Creditex, London-based CreditTrade and New York-based hybrid voice and electronic broker GFInet.
Barely a week goes by now without the announcement of some new trading platform and investors can probably find an online venue to suit whatever instrument or style of trading they seek. However, the major issue is liquidity, with many of the platforms struggling to win volumes. There are already more electronic venues than can survive in the long term, with many banks and broker-dealers hedging their bets and supporting competing platforms. Forecasting the winners would be useful because although most platforms claim to offer internet links, in reality many of the connections are still via dedicated lines.