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Alternative Trading Systems in European Equities

Celent says alternative trading systems in Europe will struggle to increase trading volumes, despite catalysts such as MiFID. The most likely scenario, in the near term, is that equity execution options will increase, but little liquidity will be siphoned away from the traditional exchanges.

The future of alternative trading systems (ATSs) in Europe is not as bright as many market participants envision, even though there are an increasing array of options for equities trading in Europe outside the traditional exchanges. The consensus that ATS trading will increase rapidly after the implementation of the Markets in Financial Instruments Directive (MiFID) is overly optimistic, according to a new report from Celent, Alternative Trading Systems in European Equities.

The European landscape is increasingly populated with alternative trading systems (ATSs). The ATSs include a wide assortment of parties: crossing networks, limit order books, request for quote (RFQ) ser¬vices, and even negociation tools. A number of dark liquidity pools have come to Europe from the US, including ITG Posit and Liquidnet. New, innovative limit order books that employ alternative trading models include Instinet’s Chi-X in the UK, TradeCross’s WETRA in Germany, and the announced but yet to be fully defined Project Turquoise.

“To date, ATSs have had only a marginal impact on equities trading in Europe” says David Easthope, senior analyst and coauthor of the report. “The presence of mature, electronic limit order book systems at exchanges presents a significant hurdle to ATSs wishing to penetrate the European market.” While there have been numerous attempts to launch ATSs in the UK in particular, and in Germany to a lesser extent, none of these attempts have managed to attract significant order flow. By 2011, Celent predicts that ATSs in Europe will have captured only 5% market share.

“MiFID is widely touted as the catalyst to dramatically increased volumes on ATSs,” says Octavio Marenzi, president and CEO of Celent and coauthor of the report. “However, while MiFID does allow ATSs to establish themselves in countries with concentration rules, the historical absence of concentration rules in the UK and Germany has not allowed ATSs to flourish.” However, post-MiFID, Celent expects ATSs’ proposition to be strengthened moderately in two main areas: liquidity and anonymity. But before ATSs can start to garner market share in Europe, they have a number of hurdles to overcome, including the development of an operational system, connectivity to users, clearing and settlement arrangements, and the attraction of liquidity.