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Capital Markets

Trading systems: Instinet launches pan-European MTF to take on everyone

Project looks great on paper. But will it succeed?

Instinet is planning to launch a revolutionary pan-European alternative trading system that, if successful, will shake up the European cash equities market far more significantly than any of the merger permutations being fought for by Europe’s and New York’s most powerful incumbents.

The alternative trading venue, or multilateral trading facility (MTF), called Chi-X, is scheduled to begin operating in mid-to-late November and promises to charge users just 10% of what they pay per trade on exchanges such as the London Stock Exchange and the ability to trade about 10 times faster than they are able to on Deutsche Börse, Europe’s fastest exchange, and 29 times faster than on Euronext, Europe’s slowest big exchange.

Chi-X will also have a system capacity far greater than any of the exchanges. Chi-X claims that it will be able to handle up to 10,000 trades per second. The LSE, by comparison, can handle only 600 trades per second and Virt-X just 65.

Price, speed and capacity are all burning issues as average trade sizes continue to fall while volumes soar, thanks to hedge funds’ high-volume trading strategies and the widespread embrace of algorithmic and portfolio trading.

The fragmentation of Europe’s clearing and settlement bodies along national lines has been the undoing of others that have tried to launch multi-jurisdictional exchanges in Europe but Instinet appears to have cracked the problem by teaming up with Fortis which, with 40 general clearing memberships across Europe, will provide a centralized clearing and settlement solution for cross-border trading done through Chi-X.

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