Late last month, for the first time in its history, the London Stock Exchange's (LSE) share of trading in FTSE 100-listed stocks fell below 50% in intra-day trading: cue endless column inches on the death of the traditional stock exchange and the rise and rise of the so-called multilateral trading facility (MTF). This is indeed a significant milestone, but it should not be regarded in any way as marking the beginning of the end for the incumbent bourses.
There is no question that the likes of Chi-X and BATS in Europe, or indeed BATS Exchange and Direct Edge in the US, among other alternative trading platforms, have clawed great chunks of market share away from traditional exchanges, but it is far too early to start predicting the incumbents' demise. Primary exchanges remain a critical part of the global capital markets, particularly with respect to price formation, and are hitting back at the MTFs with new technology and acquisitions. It should also be remembered, when considering last month's landmark statistic on FTSE 100 trading, that the LSE now owns a controlling interest in Turquoise, the much-fêted, formerly broker-owned MTF that, despite all the fanfare, failed to gain more than 3.1% of the market.
Diversification rules
Stock exchanges across the world are learning to adapt to the new competitive landscape. They realise that simply executing trades has become a highly commoditised activity and have for a long time been developing a raft of other products and services by which to diversify their income. In the case of the LSE, it recently bought a Sri Lankan technology company, MillenniumIT, to overhaul its trading technology. Not only will this give the exchange faster trading capabilities, but it also means that it can continue to sell on technology to other bourses, much like its peers in the US. The Johannesburg Stock Exchange is already one of the LSE's higher-profile customers.
It is in the US, however, that the so-called demise of the traditional exchange is most marked. Neither of Wall Street's gorilla exchange operators, NYSE Euronext and Nasdaq, trade more than 50% of the available liquidity in their own listed stocks. Despite this, they are still the biggest and most diverse players in the marketplace. It is the same all over the world. In Japan, the Tokyo Stock Exchange (TSE) has tended to lag behind in the past on the technology front. However, the TSE recently launched its Arrowhead trading system and its chief executive, Atsushi Saito, has Japan's version of the MTF, the proprietary trading system, firmly in his sights.
For the time being, the incumbent primary exchanges are critical in providing listings, liquidity and aiding price discovery. The MTFs could not exist without the traditional exchanges, but it is also safe to say that the traditional exchanges would probably prefer to exist without the MTFs.
