The belief is prevalent that intermediaries, brokers and market makers, are becoming surplus to requirement. Arguments supporting this notion are pretty formidable. Put simply, with the emergence of electronic communication networks (ECNs), Tradepoint and crossing networks like Posit and e-Crossnet, institutions are able to trade among themselves, cut out the intermediary and associated commissions.
In a recent speech John Langton, chief executive of the International Securities Market Association, said competitive pressure to cut costs will lead to precipitate an erosion of the status quo in favour of electronic trading. Few would dispute this yet despite the rationale for moving towards e-platforms, fund managers have yet to place large orders and generate liquidity and brokers’ raison d’être remains in tact.
Tradepoint, the electronic exchange launched in 1995, seemed a perfect product. It is open to both buy and sell sides, provides its own pricing mechanism and is formally recognised by the EU. Firms place orders anonymously and the system matches them automatically. Earlier this year it announced a partnership with SWX, the Swiss stock exchange, to create Virt-X, a new European blue chip exchange. But it has struggled to bite into the market and its daily volumes are much the same today as they were at the end of 1997.
Market share in the UK is less than 1% but Virt-X should lift this to 10% of European blue chip business. Tradepoint has failed to increase its share because until recently it was accessible only through a Tradepoint terminal. To counter this it has struck deals with GL Trade, Royal Blue and Primark to connect the exchange with the end user and this should increase its share.
Trade point has formidable backing but when the LSE order book packed up earlier this year Tradepoint failed to clean up. “What are Tradepoint offering that the stock exchange isn’t? Where are they adding value and why should they be getting orders that the LSE SEPS?? Product or any other order book around Europe, CAC or Xetra offers. I don’t think they are offering anything that adds value,” says Malcolm Robertson, chief operating officer of ITG Europe.
The links with Royal Blue and GL trade should help business at Tradepoint. GL Trade allows the institutional investor to choose from the 250 brokers listed on its private network. “Brokers have their own networks but institutions like to be able to have a choice of who they are using, they like to be able to negotiate the cost of transactions,” says Malcolm Donaldson, managing director of UK GL Trade.
Tradepoint has failed to persuade managers to place large orders regularly. This is due in part to a reluctance to change. It’s also due to a distrust of electronic, or online trading. “If we’re talking institutional investors it’s very unlikely that they are going to put the confidence in putting enormous orders on the internet which, if something goes wrong, is untraceable and that’s the beauty of a private network,” says Donaldson
In addition to electronic exchanges are ECNs and crossing networks like POSIT and E-Crossnet. Changes in securities regulations in the US back in 1997 led to a flurry of new ECNs joining Instinet, America’s first network. Take up in Europe is less but institutions have warmed to crossing networks that match orders anonymously at mid-price, avoid market impact and exclude the intermediary.
Malcolm Robertson, chief operating officer at ITG Europe, operators of POSIT, believes brokers face little threat from e-platforms and crossing networks. In America ITG has been going for 14 years and still have only a 2% market share. “Crossing is never the tail wagging the dog,” he says. POSIT’s market varies between 2% and nothing, balancing out at about 0.6%. POSIT crosses four times a day and this can produce inefficiencies, “We run the risk that we have lots of buyers at 9.30 and lots of sells at eleven o’clock and never the twain shall meet,” says Robertson. Confidentiality means Posit is unable to make calls to match buyers and sellers but a broker would fill the role. As Robertson admits, crossing networks are a niche product serving an extremely useful purpose. What they are not is a threat to traditional exchanges. “There’s a certain saturation point that we can get to,” he says.
Although bureaucrats in Brussels would argue otherwise, there’s a lack of homogeneity across Europe and in certain countries, severing ties with a broker, or cutting them out isn’t feasible.

Topics