[December 05, 2013]

Final MiFID Regulations Creating New Challenges and Opportunities for European Exchanges; TABB Says 65% of Traders See 2014 Business Model Turning More Multi-Asset

With the sale of Euronext scheduled for mid-2014, European exchanges are priming themselves for radical change. Although the full outcome of MiFID II regulation has yet to play out, TABB Group in new research says a chain of events that will transform the incumbent exchanges is already in motion.

With declining equity turnover set to continue, says Rebecca Healey, a London-based TABB Group Europe senior research analyst and author of "All Change at the Exchange: The European Exchange Landscape Post-ICE/NYSE Euronext," unless radical changes are made to the business model, growth at exchanges will come from either increasing market share or diversifying out of cash equities.

As fixed income, derivatives, FX and other OTC markets become automated, exchanges will not only be expected to offer more multi-asset, multi-region and multi-currency services, but also to offer them at the same level of automation and service currently offered for cash equities. According to Healey, "we believe the evolving European regulation in a challenging economic climate may be the catalyst required to overcome existing inertia and drive through necessary innovation in both product and pricing."

With MiFID covering all instruments, the push to greater transparency across all asset classes will provide significant opportunities for trading activity on exchanges across different asset classes. Increased regulation will suit exchanges because the requirement to monitor trading olumes will lead to greater data requirements and data sales, Healey explains. But Healey warns that diversification alone is insufficient. "Widespread customer dissatisfaction of the status quo plus the increasing demands for greater transparency from regulators and fairness of participant business practices are creating clamour for change."

Newcomers have emerged, challenging the incumbents, countering the claim that European exchanges are heading for relegation. Healey says BATS Chi-x's growing market share has been well documented but others are competing, including Turquoise where value traded has increased at a time when most other national exchange volumes are declining. From data charges to order types, recent initiatives at Aquis, BATS Chi-X and Turquoise offer the ability to trade pan-European securities via a single connection.

In addition to exchanges diversifying revenue sources, trading practices are evolving, becoming increasingly global and multi-asset on the buy side, with banks and brokers following suit. "This represents a significant opportunity for data and technology vendors," she says, adding that new trading models have already captured institutional investors' attention. "With 98% of the buy side opting to interact with dark order flow, the ability to rest passive orders with no participant initiating the match is delivering improved performance in larger sizes with no risk of adverse selection."

As the cost of trading shifts to the cost of investment, TABB sees clearing factoring into execution decisions. Additionally, as clearing moves into the world of collateral management, the ability to optimise portfolios across different asset classes and geographies will open up further opportunity.

"From investment to execution to settlement," says Healy," who stood for what and why in European capital markets is fundamentally changing. Specifically, changing fund flows, reduced commissions and a persistent shift from vanilla equity products to alternative asset classes will require exchanges to continue to redefine their roles to survive. As we move into 2014, it's all change at the exchange."

The 25-page report with 15 exhibits and the Executive Summary can be downloaded by TABB Research Alliance Equity clients and pre-qualified media at
http://www.tabbgroup.com/PublicationDetail.aspx?PublicationID=1424.

For more information or to purchase the report, write to [email protected].

About TABB Group

Based in New York and London, TABB is the only research and consulting firm focused exclusively on capital markets, based on the interview-based, "first-person knowledge" research methodology developed by Larry Tabb. For more information, visit www.tabbgroup.com. In 2010, TABB launched TabbFORUM, the online capital markets community for peer-to-peer opinion and analysis covering current industry issues, tracked daily by 18,000-plus professionals; in October, 2013, QuantFORUM, a new online channel for the quantitative investing community went live.

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