“Stock exchanges have long been aware of the pressures from pan-European regulation such as MiFID and the effects of cross-border consolidation in eroding the typical monopolistic national exchange structure. The truth about the changes, however, is likely to be more prosaic than we’re led to believe from the sales pitches of those who stand to benefit from bold predictions of profound change. The most discussed consequence of MiFID – that it will lead to fragmentation of liquidity and the eventual downfall of exchanges is far from inevitable.
“MiFID has certainly made it easier, but not easy, for new market entrants to get their license to operate through the creation of the Multilateral Trading Facility (MTF) status. Implementing MiFID’s requirements has also encouraged the larger dealers and broker dealers to review their business models to look at new ways of doing business and find opportunities for maximising synergies. Significant resources have been allocated to re-engineering internal processes, including routing mechanisms to the available markets.
“It has been claimed that these developments will steal liquidity from existing providers. However, changing connectivity is only one of four enablers for moving liquidity from the efficient best execution engines of the public limit order books of existing markets. History shows us that new entrants cannot afford to ignore any of these enablers in building their business models, without risking their business fading into insignificance once funding dries.
“Beyond connectivity, what are these enablers?
“The most obvious is giving a significant discount in fee, which is offered as an incentive to market users to switch trading venues. Lower tariffs, and in some cases periods of free trading, have been a traditional fanfare for new market entrants. However, past experience shows that this approach alone hasn’t been enough to shift liquidity in any significant volume.
“More important for new market entrants is the fungibility of post trade services. Any serious offering must from day one be able to provide an effective substitute for the services supplied by incumbent operators. virt-x has extensive experience in this area, having pioneered the dual clearing and settleme