Aug. 18 (Bloomberg) -- Turquoise, the European trading system created by Wall Street and European banks as an alternative to stock exchanges, is seeking a buyer as competition grows for a shrinking pool of business.

Turquoise hired UBS AG to solicit bids, according to people familiar with its plans. The London-based company sent out sales documents to about 18 possible suitors including London Stock Exchange Group Plc, Deutsche Boerse AG, NYSE Euronext, SIX Group, Chi-X Global and Nasdaq OMX Group Inc., said seven people who declined to be identified because the talks are private. Turquoise Chief Executive Officer Eli Lederman confirmed the company is working with UBS to study its options.

“This is the beginning of the next wave of consolidation in the industry,” said Mamoun Tazi, the London-based exchange analyst at MF Global Ltd. “The players are a little different because the industry is a little different. Still, the issues aren’t. As volumes become scarce and companies seek to survive, people have to find solutions.”

Traditional exchanges are facing competition from platforms operated by Turquoise, Chi-X and the European venture of Bats Global Markets Inc., which are backed by investment banks and brokers, and alternative trading systems from Nasdaq OMX and NYSE Euronext. European Union rules in 2007 sparked a battle over trading fees and speed of execution.

Established Exchanges

Turquoise, which competes with established European exchanges such as the LSE and Deutsche Boerse, started operating in August 2008. In June, Turquoise said it would approach existing shareholders for a third round of fundraising.

The investment banks that founded Turquoise had an agreement to make markets in the stocks it offered that expired on March 13. On March 25, the European unit of Bats Global Markets overtook Turquoise in the percentage of trades matched for the first time, prompting Turquoise to change its tariffs.

Volume has since bounced back and Turquoise accounted for 8.4 percent of the U.K.’s FTSE 100 trading, 7.4 percent in France’s CAC 40 and 5.7 percent in Germany’s DAX as of 12:19 p.m. London time today, according to Bats data.

There’s a “sense among our shareholders that we’ve accomplished their objectives of a more efficient and competitive European trading environment,” Lederman said. The company is working with UBS “to continue to develop Turquoise as a business and to develop a scenario where we positively influence market structure in Europe.”

Nasdaq Talks

Turquoise held conversations with Nasdaq OMX earlier this year. They didn’t progress as no agreement could be reached on valuation, three people familiar with the matter said.

Bethany Sherman, a spokeswoman at Nasdaq; Patrick Humphris, a spokesman for LSE; Werner Vogt, a spokesman for Swiss exchange operator SIX Group; Frank Herkenhoff, a spokesman for Deutsche Boerse; and Richard Adamonis, a spokesman for NYSE, all declined to comment.

The founders of Turquoise include Morgan Stanley, Goldman Sachs Group Inc., Credit Suisse Group AG, UBS and Merrill Lynch & Co., which was forced to sell itself to Bank of America Corp. in September.

Overall trading volume has fallen amid the worst financial crisis since the Great Depression, leading some analysts to question whether there’s enough business to go around.

‘Lasting Losses’

“We do not expect dozens of alternative trading platforms to be established in Europe in the long term,” said Martin Peter, an exchange analyst at Landesbank Baden-Wuerttemberg. Lower trading volume and rising competition will lead to “lasting losses instead of break-even for many newcomers and a shakeout as the last consequence,” he wrote in a report today.

Nasdaq, the second-largest operator of U.S. stock markets, said this month quarterly profit slid 31 percent as growing competition sapped market share and forced it to cut prices to lure business. Deutsche Boerse, Europe’s largest exchange by market value, reported a 34 percent drop in second-quarter profit and said it’s unsure share buybacks will resume.

The German exchange said it will press ahead with its own alternative trading system.

“We are on track with our pan-European equity trading offering Xetra International Market and will publish fee details in mid-September,” Deutsche Boerse’s Herkenhoff said. “Market start will be in November this year.”

Challenging Rivals

NYSE Euronext, the world’s largest owner of stock exchanges, reported a second-quarter loss last month after severance payments and a charge to end a clearing contract eroded earnings. LSE has said it will change the way it charges for trading and cut fees as Chief Executive Officer Xavier Rolet takes on new rivals that together have grabbed more than 30 percent of trading.

Citadel Investment Group LLC said July 21 that it will take a majority stake in Equiduct Trading, a European alternative trading system seeking to wrest trading from established exchanges which hadn’t done much business.

“You can’t carry on hoping that things will get better when volumes aren’t going anywhere,” said Herbie Skeete, London-based managing director of Mondo Visione, which advises exchanges. “Margins are thin. It’s a question of the weaker players being taken out. There is surplus capacity in the industry. Turquoise will find someone to buy them. The question is how much will they get.”

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net.

Last Updated: August 18, 2009 07:39 EDT