Upstarts Are Taking Aim
At the London Exchange

Chi-X, Turquoise Leading the Charge;
'A Cauldron of Competition' in Trading

By NEIL SHAH
August 14, 2008; Page C1

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 Börse 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 cauldron of competition," says John Lowrey, who runs electronic trading for Lehman Brothers in Europe, which holds a small stake in Chi-X. Mr. Lowrey expects the price of trading to fall by 50% 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. Mr. 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.

Mr. 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% to 40% of all European trading. Algorithmic traders use computers to identify market discrepancies and make often millions of fast transactions.

To attract the business, Chi-X charges 0.0005 percentage point on such trades, roughly one-seventh the price charged by the LSE, Mr. Randall says, though he warns the two pricing systems are hard to compare. As a result, Chi-X garnered 17.5% of trading in shares listed on the U.K.'s FTSE 100 index at the end of July. The LSE says its fees depend on the volume of a client's business.

Chi-X has "helped us reduce costs for clients," says Chris Jackson, a Merrill Lynch director who uses Chi-X to perform trades for U.K. clients. "We do expect incumbent exchanges to lose additional market share as the new platforms come on-line." Merrill has stakes in Chi-X and Turquoise.

Turquoise, meanwhile, has its work cut out for it. The firm, backed by many of the same banks that support Chi-X, stumbled early on because of a lack of leadership, Mr. Lederman says. "It was a part-time job for many people," he says. The 40-person firm now hopes to distinguish itself from Chi-X by giving clients access to a "dark pool," or electronic network that matches buyers and sellers anonymously, he says.

Chi-X, Turquoise and the other new entrants are coming at a time when a sharp economic downturn in Europe is threatening to shrink the trading business overall.

The LSE is taking the threat seriously. As of Sept. 1, it plans to cut certain fees for sophisticated and larger clients. Together with Lehman Brothers Holdings Inc., it also aims to launch a dark-pool venture early next year called Baikal. Spokesman Patrick Humphris says the added business from sophisticated traders can benefit both upstart and established players.

Increasingly, though, Europe's national exchange operators are looking to poach one another's clients by launching pan-European services, in which they offer to trade shares of companies that aren't listed on their exchanges.

"We've seen almost weekly announcements by the exchanges to introduce pan-European" platforms, says Larry Tabb, chief executive of financial-services consulting firm Tabb Group. "Without a doubt, we are headed headlong into a European exchange price war."

The arrival of so many new platforms raises the possibility that they will drive each other out of business. By taking stakes in multiple platforms, banks are hedging their bets in case some fail. One view, shared by Mr. Randall, is that the platforms will eventually merge, and thus remain a threat for Europe's big exchanges.

"I don't think it's a rivalry," says Mr. Randall, adding that he has been friends with Mr. Lederman for several years. "It's more like co-opetition."

Write to Neil Shah at neil.shah@dowjones.com