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Opinion

Exchanges: Cash equities out in the cold

Institutional investors have been poorly served by most platforms. Mergers won’t make much difference.

The flurry of M&A activity among the world’s largest exchanges might well offer some revenue benefits but it will do little to help the plight of institutional or retail investors. Agreed tie-ups from the London Stock Exchange and TMX, and Deutsche Börse and NYSE Euronext, among many, are responses to a decrease in revenues from cash equity trading as margins have come under pressure from competition.

But to an extent the exchanges have only themselves to blame. Revenues at cash equities exchanges are something of a transaction volumes game. So high-frequency traders have been the customer segment of choice for the past few years. That has been to the detriment of institutional investors, which have had to look elsewhere to transact lest they be subject to the market moving against them.

High-frequency traders have much smaller orders, making it easier to detect large block trades coming into the market. Many will have algorithms in place that react to large sales, potentially instigating a panic sell-off and hindering an asset manager from selling further large blocks of stock.

That has been good news for firms such as Liquidnet that cater entirely to an institutional market.

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