Upstarts are taking aim at the London exchange
In a brick building with darkened windows outside the heart of London's financial district, a fledgling firm called Chi-X Europe Ltd. is leading a foray into the territory of London Stock Exchange Group PLC.
Chi-X's chief executive, 53-year-old Peter Randall, hopes to challenge the 300-year-old exchange by winning over clients such as banks and hedge funds, whose rapid-fire automated trades make up a growing share of the market.
The firm's efforts are just the beginning of what could be a major change in a business long dominated by established players such as the LSE, Germany's Deutsche Boerse AG and New York Stock Exchange parent NYSE Euronext. Encouraged by new European rules aimed at increasing competition, some of the world's biggest investment banks are putting their weight behind upstart trading platforms such as Chi-X and Turquoise, a venture led by former Morgan Stanley electronic-trading chief Eli Lederman.
Their aim: gain more influence over a business that generates more than $9 billion in annual revenue, and cut the daunting expense and hassle of trading in Europe, where the process of buying, transferring and paying for a stock can cost about six times as much as in the U.S.
"You can expect a caldron of competition," says John Lowrey, who runs electronic trading for Lehman Brothers in Europe, which holds a small stake in Chi-X. Lowrey expects the price of trading to fall by 50 percent in Europe over the next few years.
The newcomers can offer lower prices because they operate with a fraction of the costs of their older peers and eschew traditional functions like listing stocks.
The battle is likely to heat up this fall as a flock of new platforms joins the year-and-a-half old Chi-X. Lederman's Turquoise starts limited trading Friday and launches in September after more than a year of delays. Nasdaq Stock Market operator Nasdaq OMX Group Inc. is set to unveil a platform next month that will compete for some of the same clients as its OMX Nordic exchange. Kansas City, Mo.-based BATS Trading Inc. is considering November for the debut of its own European service.
A native of Manchester, England, Chi-X's Mr. Randall says he got into electronic trading to "challenge the status quo." He received degrees in management and law from Oxford University and the London School of Economics, respectively, and spent his early career analyzing stocks.
For several years in the 1990s, he served as chief of the Asian operations of Instinet LLC, now a brokerage unit of Japanese bank Nomura Holdings Inc. that performs electronic trades for big investors. Instinet launched Chi-X in November 2006, giving stakes to major banks the following January but remaining the venture's majority owner. The name refers to the Greek letter for "X" and suggests a "crossing" or exchange.
Randall has gotten Chi-X off to a good start, largely by catering to the needs of traders at banks and hedge funds that specialize in so-called algorithmic trades, which now account for roughly 20 percent to 40 percent of all European trading. Algorithmic traders use computers to identify market discrepancies and make often millions of fast transactions.