As investors worldwide rush back to the market and trading volume surges, these should be fat times for Europe's big bourses. But with a slew of upstarts taking business away from the London Stock Exchange (LSE.L), Deutsche Börse (DB1GN.DE), and other established exchanges, the old-guard trading venues are scrambling to hold on to their positions as the top places to buy and sell stocks.
The competition is starting to hurt. Two years ago the London Exchange accounted for 95% of all trades in Britain's leading stocks; in July that sank to just 64%, according to Thomson Reuters (TRI). In Frankfurt, the mighty Deutsche Börse watched its hold on German trading fall from a near-monopoly to 75% over the same period. By the end of next year, reckons financial consultantcy Celent, both exchanges could see their share drop below 50%. "Incumbents have been really slow to react," says Celent capital markets analyst Anshuman Jaswal.
The new entrants are low-cost electronic trading systems similar to those that took the U.S. by storm in the 1990s. Though not available to retail shareholders, they're heavily used by institutional investors such as hedge funds and investment banks. These outfits use the new platforms to trade large blocks of shares—typically the most liquid stocks listed on the big exchanges—while avoiding the relatively high fees charged by the bourses. More than a third of shares in telecom giant Vodafone (VOD), for instance, are now traded on the new platforms.
The upstarts have gotten a big boost from European Commission regulators. In November 2007—just as share prices were peaking—a rule change opened financial services to continentwide competition and required brokers to seek out the cheapest venues. Now, with shares finally climbing out of an 18-month funk, the old bourses are starting to feel the heat from the new rivals. "It's an inescapable trend: We're taking a larger slice of the pie," says Mark Howarth, chief executive of London's Chi-X Europe, which is now the region's third-largest trading platform, behind the LSE and NYSE Euronext (NYX).
Key to the newcomers' success is speed and low overhead. They execute trades far faster than the established players and employ less than a third as many people per million trades. So their fees are less than 10% of what the big bourses charge. "New technology and lower costs are what traders really want," says Mark Hemsley, chief executive of BATS Europe, a unit of Kansas City (Mo.)-based BATS Exchange, the third-largest U.S. trading platform.
lightning speedIn response, the LSE, Deutsche Börse, and NYSE Euronext have all slashed fees at least 25% since January and have started offering discounts to heavy traders. And taking a page from their rivals' playbook, some exchanges are launching their own low-cost platforms. Deutsche Börse's Xetra International, for instance, will make its debut in November in six countries.
No one expects Europe's big exchanges to disappear. Less sophisticated investors will still trade at the established venues, and revenues from other sources, such as new stock listings, will pick up as the economy recovers. The big bourses' days of monopolizing European trading, though, have drawn to a close. Says Phillip Silitschanu, European research director at financial advisory firm Aite Group: "The exchanges will have to learn to play nice with new competition."