Something very interesting and curious is going on in this little corner of the equity world in Chi-X. See here. Now you might wonder, why on earth would various institutions such as BNP Paribas, Citigroup, Credit Suisse, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale, UBS, Deutsche, Citadel, Fortis, Getco, Lehman Brothers and Optiver want to invest in what I would ostensibly call as a competitor to their own business and to other units they have setup such as Turquoise?
If I have my thinking on right, its as follows. First is that market fragmentation does not really matter to a client to that extent because the broker will provide best execution. Second, multiple exchanges does not matter in the day and age of electronic trading where the incremental cost of trading is frankly near zero. And in the age of volume related fees, market depth, icebergs, algorithimic trading, etc., (if you plonk in your operational research or nonlinear optimisation model), you can split up your market facing trades suitably that the cost of trading (both explicit cost and transaction cost) on multiple exchanges is no different from trading on one. Third, additional shareholding is not that expensive in the longer scheme of things, compare the market capitalisation versus say the revenues earned by any of these big bank's equity operations in europe, massive ratio's. Fourth, sometimes it is easier to trust an outsider (in this case Instinet) than each other! :), and so on and so forth.
In any case, I am all for this, good work by these plucky chaps!
All this to be taken with a grain of piquant salt!!!
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