Centralised exchange: The nail in the coffin of the exchange argument
For years the debate raged about when FX would embrace a model like the equity market and move on to a centralised exchange. For a time, I subscribed to this view, especially around the time I tried somewhat cheekily to buy EBS – but that’s another story.
Of course, as we all know, the market has continued to thrive in its fragmented state and technology has, for many players, made the concept of pooled liquidity a – virtual – reality. Interestingly for us anorak-wearing market watchers, the equity landscape appears to be moving to an FX-like model, rather than the other way around.
In Europe, the Markets in Financial Instruments Directive (Mifid) is starting to have an impact. In the UK, the London Stock Exchange has consistently played down or even dismissed the threat of competition that this will bring, despite being forced to cut its tariffs and (supposedly) upgrade its technology. And it continues to dismiss the threat, even after the debacle of a massive system failure on Monday that resulted in the loss of almost the whole trading session.
An LSE spokesman somewhat naively pointed out to me that there was no significant increase in volume on Chi-X, a rival trading facility, because activity ceased as there was no dealing on the main exchange. For the moment this is true. But things will almost certainly change, especially once the big brokers sort out their order routing capabilities.
It wasn’t so long ago that EUR/USD trading would stop almost completely if EBS suffered an outage.