Let the Market Consolidation Begin

Earlier this week, Chi-X Europe officially announced that someone inquired about a possible total or partial acquisition of the multilateral trading facility (MTF). Since the privately owned MTF decided to go public with this news, it’s obvious that it is looking to churn up interest from other potential suitors, drive up the sales price and hopefully ignite a bidding war.

My initial take on it was that the interested party was most likely Deutsche Börse, since it was the only global exchange operator without a presence within London. Since then, the financial press has floated the idea that Bats Global Trading was the prospective suitor.

I based my initial estimate on who had the most to gain by acquiring Chi-X. However, I should have also taken into consideration what most MTF and exchange operators have to lose if they do not acquire it.

Exchanges and MTFs are expensive to operate and they need a good market share to just cover their operating expenses – say about at least 8 percent if not up to 10 or 12 percent. And except for Chi-X and now Turquoise, which was acquired by the London Stock Exchange (LSE), no other market really fits that bill. A number of the MTFs are continuing to gain market share, but they are burning a lot of capital in the process. By acquiring Chi-X, the new owner will have the liquidity and the operational infrastructure in place and be in a cash-positive position.

The eventual acquisition of the largest MTF also signals the start of the market consolidation. Considering how close the next iteration of the Markets in Financial Instruments Directive (MiFID) is, it is doubtful that the industry will see anyone launch new equities MTF or acquire one in the near future.

However, the space is looking bright for MTFs trading fixed-income instruments and the industry should expect to see a lot of development in the dealer-to-dealer and dealer-to-client spaces.