April 12, 2012

LONDON -- Europe's aggressive new low-cost stock markets are set to storm into the only major European market where they still lack a significant share, helped by the collapse of a Spanish bank plan to set up their own rival to the main exchange.

The upstarts - Bats Chi-X Europe and Turquoise - have this year been posting month-on-month market share gains in Spanish stocks, and are emerging for the first time as serious venues for trading these shares in Europe's fourth largest stock market.

They are also now well placed to take the business the banks had hoped to grab for themselves until a lack of funds forced them to abandon the rival project, called PAVE, in February.

The numbers are still relatively small, but traders, who like competition among exchanges as it tends to reduce fees, believe the new entrants could soon gather critical mass, attract key players such as the local Spanish brokers who might have been expected to use PAVE (Plataforma Alternativa de Valores Espanoles).

"The progress in Spain has been gradual but I expect to see more Spanish business move from here on," said Adam Toms, co-global head of electronic trading at Japanese investment bank Nomura International.

Alternative markets like Chi-X, Bats and Turquoise have taken as much as a third of the market in British, French and German share trading since the European Commission passed new rules to boost competition among exchanges in 2007.

But Spain is the last major market where the national exchange retains the massive majority of trading in domestic shares, largely due to technicalities that meant new entrants could not compete effectively with the incumbent.

These issues were partly addressed last year, when dominant Spanish exchange Bolsas y Mercados Espanoles relaxed rules around the settlement of Spanish shares, leaving the way clear to new entrants.

Chi-X Bats Europe and Turquoise responded late last year with aggressive price promotions and have trebled their Spanish market share to about 6 percent while the BME is down by the same amount to 92 percent, Thomson Reuters data show.

"It looks like we are finally starting to make real progress in Spain," Paul O'Donnell, chief operating officer at Bats Chi-X Europe told Reuters in an interview.

A spokesman for the BME declined to comment.


O'Donnell said alternative exchanges have learned from their experience in Britain, France and Germany that a 5 percent market share represents a tipping point beyond which trading firms start to take a new market seriously.

"The local Spanish brokers ... are already starting to look at accessing Bats Chi-X Europe," said O'Donnell.

The new European exchanges are owned and used by the world's largest investment banks, like Citigroup, Credit Suisse and Morgan Stanley, and electronic market-makers, like Getco and Optiver.

But the Spanish brokers serve a different type of client from those served by these large international banks - who often have similar trading strategies.

The Spanish brokers will tend to hold more opposing views - increasing the chance of a trade happening and so generating valuable business, which in the absence of PAVE, could now go through the Chi-X Bats and Turquoise.

Spain is Europe's fourth largest equity market, home to blue chips such as Banco Santander, Iberdrola, Repsol and Telefonica.

(Editing by Andrew Callus)


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