The European Market in US Shares

Both Turquoise and NYSE Arca Europe announced last week that they were to launch markets in US shares during European hours.  Will these ventures work when attempts in the past have been curiously unsuccessful?

In the late 80s the LSE’s SEAQ International market was launched with the prime objective of establishing a liquid US equity market in European time but, whilst it succeeded in creating liquid markets in the blue chips from all other major global markets, US equity trading never lived up to expectations.  The overlap of trading hours with London meant that European investors could wail until New York was open, and the enormous liquidity available in the home market meant that most of them preferred to do so.

In the 90’s, at the height of the tech boom, there was a burst of excitement about trading Nasdaq stocks in London for the European market. CREST established a settlement link with DTCC. DTCC set up a European central counterparty. Market-makers, such as Knight Securities, established high-profile London operations. Then the excitement deflated as the air went out of the tech bubble. The market-makers and the DTCC European CCP closed down. The CREST-DTCC link remains in place but now is probably used mainly by brokers providing services for retail clients.

Have things changed enough since these two earlier ventures for Turquoise and NYSE Arca Europe to fare better?  Well perhaps.  Algo trading, global networks and smart order routing could effectively level the playing field for the European MTFs during US market hours. But inevitably total liquidity in US equities earlier in the European day will be lower and there will be the risk of being caught out by announcements made just before the US opens. Will these factors continue to keep trading on the MTFs thin until New York opens?

In general, the success of a trading initiative depends on the efficiency of the post-trade arrangements behind it. Again, DTCC has a European clearing house, EuroCCP, which will provide clearing of US securities in Europe with settlement in DTCC in the US. The real question is whether this is enough for traders to regard the European MTFs as part of the same trading space as the US. Or is it necessary to go a step further and make European trading fully fungible with US trading through a single clearing process?

Peter Cox & Hugh Simpson

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