The new year is shaping up to be the one in which multilateral trading facilities and real competition between execution venues finally take off in Europe. Advances in technology and a favourable regulatory regime make it much easier today for new execution venues to win business from incumbent exchanges than ever before.
One likely consequence, apart from lower margins at exchanges, looks set to be a further concentration of institutional business in the hands of the largest brokerage houses. Although the nine leading investment banks behind the planned Turquoise MTF already claim about 50% of the trading volume in Europe, that figure is only likely to increase as liquidity fragments and scatters across multiple venues.
The reason for this is the level of investment in technology required to compete in the execution business in an unbundled and more complicated trading world. Even many of the largest asset managers baulk at the idea of matching the many millions of dollars that the top brokerage houses have spent on trading technology. Smaller brokers simply cannot afford to stay in the game unless they have particularly strong niche in, say, research or small-cap stocks. The technological arms race that characterizes the institutional brokerage business in the US is coming to Europe.
Retail brokers, by contrast, might yet enjoy some reprieve. The EUs Markets in Financial Instruments Directive does not require brokers to offer their clients best execution, it merely requires them to have a policy on how they go about executing their clients' orders. Given that even supposedly sophisticated institutional clients on the buy side have had considerable trouble in understanding what all this means, with many having seemingly outsourced their understanding of the subject to the sell side, retail clients are unlikely to be the more demanding. While retail brokers may face little pressure for immediate change, this might not last.