Adding MTFs to the Endangered Species List

Europe is about to lose another independent multilateral trading facility (MTF) as Nordic MTF Burgundy prepares to become a regulated exchange.

Given that the London Stock Exchange (LSE) bought Turquoise, and Bats Global Markets is looking to purchase Chi-X Europe, the number of free-standing equities MTFs is dropping precipitously. Off the top of my head, this will leave Bats and a few smaller players like Equiduct and Quote MTF to go head-to-head with the exchanges.

The big question is what Bats will do with Chi-X if the deal goes through. It could be about purchasing market share, technology or the goodwill of the Chi-X investors. A union of the two MTFs could represent 38 percent of UK FTSE 100 trading, and 22 percent of European volume excluding the UK, so the market share argument holds water. If Bats can maintain that volume, it can easily cover its operating nut. However, if it decides to shut down Chi-X, then those market share numbers will certainly go down. Bats isn’t a stranger to operating two quotes in the same market. It has been using that model in the US quite successfully.

The idea that Bats is acquiring Chi-X for its technology isn’t a strong argument. Bats has never been one to acquire third-party technology that it can develop internally. If the deal goes through, moving Chi-X on to the Bats platform would likely be the highest priority for Bats.

Finally, considering how expensive it is to operate an MTF and the current trend of market consolidation, this would be a practical time for Chi-X investors to cash out their positions and invest the profits elsewhere. The deal seems to be a win-win for both parties if the price is right.

Disagree? Send me your thoughts at rob.daly@incisivemeida.com.