Turquoise the right colour for LSE

October 2, 2009

How fitting that the London Stock Exchange should be in pole position to buy Turquoise. After all, the upstart exchange was launched last year by some of the LSE’s biggest customers to break its dominant grip on UK share trading. But it would be wrong to dismiss the venture as a complete failure.

Turquoise may not have succeeded as a business — it has been loss-making throughout its short life — but it has achieved one of its main aims, to force the LSE to cut its fees.

New LSE Chief Executive Xavier Rolet must have calculated that it made more sense to pay up to regain the near 7 percent market share pinched by Turquoise than let the exchange fall into the hands of one of the LSE’s more serious rivals.

Turquoise has not been alone in turning the screws on the LSE. It is one of four or five multilateral trading platforms (MTFs) which have grabbed market share following the introduction of European rules designed to promote greater market competition.

Collectively they have forced down trading fees and cut the LSE’s market share of trading in FTSE 100 stocks to around 65 percent.

But under Rolet’s leadership, the LSE has hit back at Turquoise and other such ventures including Chi-X, BATS and Nasdaq OMX’s pan-European platform.

Rolet’s approach is in stark contrast to his predecessor Clara Furse, whose years as CEO saw the exchange end up pitted against some of its biggest customers.

Nor is the deal only about protecting the LSE’s position in London. It will also bring Rolet a significant foothold in other European markets.

Turquoise has set record trading volumes across the continent during the summer, hitting 11 percent of the Swiss market in July, and in August accounting for 7 percent of trading in Germany’s DAX, 8 percent of the French CAC-40 and 8.6 percent of the Dutch AEX.

Having LSE in its backyard will be a new competitive threat to NYSE Euronext. And the LSE will also be plunging fully into the world of “dark pool” trading. It has struggled to get its Baikal dark pools business off the ground, something Turquoise would bring.

Assuming the LSE does conclude a deal with Turquoise, its users will need to keep it on the straight and narrow. But as long as there is competition in the market, the banks who channel so much of their business through the London market and shifted some of that to Turquoise could easily threaten to swap the platform for one of the LSE’s rivals.

And if nothing else, Turquoise will long serve as a reminder that, with the heavyweight backing and trading flows of nine large investment banks, it is always possible to start a rival exchange from scratch.

Having driven fees down and brought competition to the market, the investment banks behind Turquoise can retire secure in the knowledge there will be no return to the bad old days.

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