Consolidation, MiFID, and competitive threats from alternative trading systems will bring major structural changes to the European capital market.
Despite consolidation within Europe and the recent transatlantic merger between NYSE and Euronext, the European capital markets remain fragmented along national boundaries, according to a new report from Celent, European Exchanges Landscape. Further consolidation, the Markets in Financial Instruments Directive (MiFID), and competition from alternative trading systems (ATS) and dark pools of liquidity will continue to alter the European capital market. Recent changes are already benefiting exchanges in Europe. There has been a significant uptick in equities trading, with 2006 trading volumes up 35% from their 2005 level. Profit margins are higher than US margins, with the average European exchange achiev¬ing a 34% profit.
But European exchanges’ recent boom is threatened by MiFID and new competitors. MiFID seeks to promote competition between execution venues, namely exchanges, multilateral trading facilities (MTFs), and firms internalizing their orders. Thus, ATSs, which are MTFs, see MiFID as an opportunity to compete with European exchanges. However, European exchanges will strongly defend their positions.
“ATSs do not represent an immediate threat for exchanges because the leading ATSs in Europe have not been able to attract significant liquidity,” says Perrine Fiorina, analyst at Celent and coauthor of the report. “In fact, having the authority to establish an ATS does nothing to ensure ability to attract order flow.”