Big Board is Out, Dark Pools are In

Big Board is Out, Dark Pools are In

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Author: Eli Magid (17 Articles)

Eli currently works in business development and strategic planning for Israel Corp. Prior to joining Israel Corp., Eli held capital markets and corporate finance positions at Credit Suisse and Morgan Stanley. In addition, he is a former financial markets entrepreneur and co-founder of a green carbon finance start-up. Eli has a BSc in Applied Economics & Management from Cornell University.

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Such is the takeway from two articles that ran in tandem on Friday in the New York Times and International Herald Tribune: Rivals Pose Threat to New York Stock Exchange and European Stock Exchanges Rattled by Upstarts.

Upshot is that the New York Stock Exchange, historically the greatest marketplace for equities in the world, is quickly shrinking as it loses trading volume to fast moving rivals creating their own private marketplaces.  Today, only 36% of daily trades in stocks that are listed on the New York Stock Exchange are actually executed on the exchange, down from about 75% only four years ago.

Trading is moving elsewhere.  New electronic exchanges such as Kansas based BATS and Jersey City based Direct Edge are only about five years old, but each now accounts for about 10% of daily United States stock trading. Trading is also rapidly increasing on “dark pools,” large blocks of shares traded directly between large banks, brokers and funds.

Click here to see historical trading volumes.

As result, the Big Board has been reeling.  Last year, its parent company, NYSE Euronext, lost $740 million and since January 2007, the share price of NYSE Euronext has lost nearly three-quarters of its value, despite soaring global trading volumes.

Same is holding true in Europe where its oldest stock exchanges were sitting comfortably for decades, making trades with antiquated technology at high prices.   Then a few years back a European Union law to harmonize investment services across the region opened up the market and disgruntled customers such as banks and brokers started setting up their own exchanges.

Lower-cost platforms sprang up, including Chi-X Europe, started in 2007 by the electronic broker Instinet; Turquoise, started in August 2008 by a group of investment banks including Goldman Sachs and Deutsche Bank; and others like Burgundy and BATS Europe. They quickly built up market share by offering faster and cheaper services across several countries, undermining the traditional view that customers will accept a higher price for the greater liquidity that comes with a bigger exchange.

As result, trading volume and revenue is being shaved off the older European exchanges. The LSE’s share of trading in FTSE 100 stocks fell below 60% on Aug. 4 for the first time in its 208-year history. Overall, the alternative platforms, also called multilateral trading facilities or M.T.F.s, accounted for 20% of the value of European equity trading in August, compared with 8.5% a year ago, according to the Federation of European Securities Exchanges.

While competition to established floor exchanges is unlikely to diminish, it may be just a bit too early to say goodbye.  NYSE has been fighting back, slashing commissions and developing its own purely electronic exchange, Arca, in Chicago. Arca has captured about 11% of the market for Big Board-listed stocks and is winning business in areas like derivatives.

Besides, floor exchanges can’t disappear entirely.  What would CNBC’s Maria Bartiromo and Erin Burnett use as frenzied and frenetic backdrops for live broadcastings?

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Author: Eli Magid (17 Articles)

Eli currently works in business development and strategic planning for Israel Corp. Prior to joining Israel Corp., Eli held capital markets and corporate finance positions at Credit Suisse and Morgan Stanley. In addition, he is a former financial markets entrepreneur and co-founder of a green carbon finance start-up. Eli has a BSc in Applied Economics & Management from Cornell University.

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