The news that Direct Edge has received approval to convert its two ECNs into exchanges brings the number of ECNs in the US down to three, accounting for only 1% of market volume. This is a remarkable turnaround from the days when ECNs were seen as the challengers to the exchanges.

The conversion of ECNs into exchanges in the US seems to be in contrast to Europe, where MTFs (their European cousins) are gaining market share at the expense of the established exchanges.

What accounts for the difference? Does the balance of regulatory obligations and benefits favour exchanges in the US but MTFs in Europe? Or does the success of the MTFs have less to do with regulatory advantage and more to do with technology and market positioning? (And not all MTFs have been a wild success, of course.)

Any ideas?

In an interesting letter in today’s FT, Roger Liddell, CEO of LCH.Clearnet raises the issue about global clearing houses vs localised clearing houses. The problem with the way the debate is going on future regulation is that each region is developing different models. If this continues we run the risk of the current global market in all sorts of products being fragmented into competing blocs. This will not be a good thing for the industry.

Roger succinctly concludes in his letter:

“As regulators and policymakers rightly seek to reform the financial system it is essential that the vital issue of reducing systemic risk does not become hostage to narrow commercial interests seeking to take advantage of the concerns engendered by this crisis. Systemic risk is a global issue and requires a global approach from policymakers and supervisors”.

It is not easy to find a single reference source for European equity MTFs and their post-trade services, so we have compiled this table. We have tried to make it comprehensive and accurate (but please inform us of any omissions or inaccuracies so we can correct it.)

The conclusion that leaps out from the table is that the most significant factor contributing to fragmentation in European equity markets is the fragmentation of post-trade arrangements. The MTFs in this table use a variety of different central counterparties or in some cases no central counterparties at all. (Not to mention that there is virtually no overlap between the CCPs used by the MTFs and the CCPs used by national exchanges.)

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The SEC has been under tremendous pressure to ‘do something’ after all market turbulence and scandals. The old short sell rule, the so-called “uptick rule”, was introduced in 1938 and rescinded in 2007 by decree of the SEC. During the market panic of 2008, the SEC took what it called “emergency action” and temporarily banned investors from short-selling financial companies. Since then the necessity or harm of a short sell rule has been vigorously debated. more >>