European securities exchanges say they’re ready for the new competition theoretically brought on by the European Union’s Markets in Financial Instruments Directive (MiFID), which came into effect on Nov. 1. The directive’s best execution provisions open the door to a whole new class of competitors for securities exchanges by mandating that executing brokers find the best deal for their customers Europe-wide, and by ordering regulators in all E.U. member states to allow banks to match certain securities and derivatives trades on their own internal platforms.
The multi-lateral trading facility (MTF) Project Turquoise, a joint venture by several leading banks, is the most ambitious new post-MiFID player. Set to come online in mid-2008, Turquoise’s stated aim is to achieve at least a 10% market share of European equities by year-end. But the exchanges already face competition from Boat, a project backed by 20 banks, and Instinet’s new platform, Chi-X – although both systems are facing final regulatory and technical hurdles and will not be completely up to speed before December.
Most member states, however, already allow internalization, and the continent’s major exchanges say they’re upgraded and ready for the new competitors. The London Stock Exchange (LSE), for example, launched TradElect four months ago, and then launched TradElect 2.0 just hours before MiFID came into effect – speeding the system by 40% to six milliseconds and increasing capacity by 70% to 4,200 trades per second. The new release also supports market-making across all liquid securities on the LSE’s order book and supports off-book transactions.
Deutsche Börse and NYSE Euronext, the number two and three European equities platforms, say their systems are comparable and will not lose out to new competitors. Germany, it should be noted, has faced competition from internalizers for years.
In the derivatives sphere, MiFID opens the door to direct competition between over-the-counter derivatives platforms run by broker-dealers and exchanges – a fight that could get interesting if broker-dealers team up with clearinghouses to offer futures as well.