A major battle is brewing between big brokerage firms, busy developing new markets, and large securities and futures exchange groups in a rivalry likely to benefit asset managers by lowering trading costs.
But to be successful, the new markets will need to capture liquidity from the exchanges, resulting in a market fragmentation that might make it more difficult to fill large orders.
“Fragmentation is a double-edged sword. On the one hand, fragmentation is negative, if it makes liquidity more difficult to locate and access. On the other hand, fragmentation creates competition for liquidity, which often helps drive transaction costs lower,” said Ray Tierney, managing director and head of global equity trading at Morgan Stanley Investment Management, New York, with $597 billion in assets under management.
“Competition drives innovation and in the long run, that's better for our business. So, if fragmentation ultimately unleashes a wave of innovation and competition, then I have to believe the short-term challenges are worth the long-term benefits to our business,” Mr. Tierney added. “Fragmentation ultimately helps neutralize the leverage of the dominant liquidity centers.”
Trade execution is dominated by four major exchange groups with global reach: NYSE Euronext, New York; Nasdaq OMX Group Inc., New York; Frankfurt-based Deutsche Boerse AG and its part-subsidiary Eurex; and CME Group Inc., Chicago.
The fee-setting and rule-making power of these trading behemoths is the main incentive for brokerage firms to set up their own markets, to which they would bring their valuable order flow and share in the profits. Early evidence indicates the firms mean business.
(A look at the new competitors and who's behind them can be found at www.pionline.com/fourseasons.)