Daly Close: Is There Room for One More MTF?

Earlier this month, the Budapest-headquartered multilateral trading facility (MTF), Quote MTF, went live with the initial trading of 10 French stocks and expects to complete a phased rollout of the remaining 815 stocks by the middle of October.

The major question on industry participants' minds is whether there are enough seats at the table for yet another MTF.

Prior to the enactment of the Markets in Financial Instruments Directive (Mifid) in November 2007, industry insiders and observers estimated that MTFs would sprout like mushrooms across the European landscape. Some even thought the market would see between 20 and 30 of these new trading venues pop up. A scant two years later, and the markets seems to be struggling to keep four non-exchange-owned MTFs-Chi-X, Turquoise, Bats Europe and Burgundy-afloat.

The global economic contraction is probably the largest reason why there haven't been more MTF launches, as investment banks have become averse to investing in unproven platforms. The second, and timelier, reason is the pricing war that has broken out between the existing venues. Competition is driving fees and rebate spreads so thin that MTFs need to capture a respectable market share to turn a profit.

One London-based agency brokerage official estimates that a new MTF operating with an annual €5 million ($7.1 million) budget would need to capture approximately €2 billion ($2.8 billion) turnover per day to cover costs if it is making 0.1 basis points (bps) on the order flow. Considering that the European equity turnover is approximately €30 billion ($42.7 billion), it would need to aim for 10 percent of the market share to generate a decent return for its backers.

Quote MTF officials say they have taken a "no frills" approach to their business model. While their matching engine resides in Interxion's Hanbury Street facility in the City of London, the rest of the business is operated out of Budapest, where labor and real estate costs are far lower than those in the Square Mile. It is the same model that Bats Trading in the US-with its headquarters based outside of Kansas City-has been exploiting successfully for a number of years.

However, how tight can spreads become before many of these MTFs find their operations unprofitable? That is the problem with transaction-based business models in a competitive market-prices can only go down. Many of the venues have also decided to give away their market data for free in order to attract traders, which has left them few readily available alternative revenue streams. If MTFs plan to grow and prosper, they are going to have to find alternative offerings to provide their clients and sure up their bottom lines.

If they take a page from the exchanges that they are competing against, it might be time to start offering value-added services beyond execution and co-location. Trading front ends, analytics packages and other products that could be white-labeled to the clients of MTF users quickly spring to mind.

This assumes that the MTFs' raison d'être is to out-exchange the exchanges and generate profits for the sake of profits. If the MTFs view their roles as a pricing check against the exchanges and are willing to drive a Ford Mondeo instead of its Jaguar XFR cousin, then the point is moot.

Rob Daly

Rob Daly is editor of Dealing with Technology and can be reached at

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