19/04/2010

The big banks and brokers that typically provide the bulk of orders to exchanges and their smaller rivals – such as Chi-X Europe and BATS Europe – have been the main beneficiaries of competition that grew out of the Markets in Financial Instruments Directive .

Enacted by the European Commission in 2007, Mifid broke the monopolies of the region’s exchanges, allowing platforms such as Chi-X to emerge and thus driving down trading costs.

Yet those benefits have not been felt directly by millions of smaller investors who rely on their local or regional broker to get share trades done.

That is because such brokers and banks have been unable to afford to make the investments needed to connect to multiple platforms such as Chi-X, BATS and other so-called multilateral trading facilities.

Regional brokers and banks have thus not had access to the full panoply of trading venues across Europe and have been unable to offer their retail customers the best prices possible for their deals, investor associations say.

But now three initiatives are under way aimed at tackling that. The aim is to suck in orders from hundreds of small- and medium-sized banks and brokers across Europe and match them on one centralised platform. Their targets are banks such as Banca Imi in Italy , German online brokers such as Consors and Direkt Anlage Bank, and BinckBank, an Amsterdam-listed online bank.

For the backers of these platforms, being able to aggregate this “flow” onto a platform they control provides them with a new source of trading liquidity against which their own orders can interact.

Peter Randall, chief executive of Equiduct, one of the three, says: “Now that fragmentation is a fact the need for aggregation of orders – particularly for retail investors – is acute. Mifid’s worked great at the wholesale level but it’s been very weak at the retail level.”

Equiduct started life as a rival to the other MTFs and was backed by Börse Berlin. But last year Citadel Securities, the US investment manager and market-making company, took a controlling stake and is turning the platform into a retail-focused bourse.

Equiduct recently signed up KBC, the Belgian bank, as a provider of retail orders. Later this quarter it will add a unit of a large French bank that specialises in aggregating retail orders from other banks, according to Mr Randall.

A second platform, known as The Order Machine (Tom), is a joint venture between Optiver, a privately held Dutch electronic trading group, and BinckBank.

This month Tom was approved by the UK ’s Financial Services Authority as an MTF. Willem Meijer, Tom chief executive, says the idea is to create “an open platform” where all market participants “can react with this order flow”.

The third platform, Tradegate Exchange, specialises in matching orders from online banks in Germany , France and Austria . In January, Deutsche Börse took a 75 per cent stake.

Frank Gerstenschläger, responsible for the Börse’s equities markets, says the platform has features aimed at day traders. “There is the intention of making it a European platform to connect day traders across Europe .”

Niki Beattie, managing director of The Market Structure Practice, a consultancy, says the new ventures mark a recognition that the power of the medium-sized banks and brokers as providers of order flow has been under-appreciated.

Now operators such as market-making groups are giving them “a seat at the table” in building new platforms where they can channel their orders.