The Boston Equities Exchange, an automated trading facility is shuttering its trading operations today, according to an announcement by the Boston Stock Exchange(BSE). The news came suddenly and suggests there could be a shakeout among the e-trading ventures formed to compete under Regulation NMS.

The BSE formed BeX in August 2005 by partnering with five Wall Street investment banks: Citigroup, Credit Suisse, Fidelity Brokerage Company, Lehman Brothers and Merrill Lynch. The trading platform was based on technology from Citi’s Lava Trading subsidiary and Atos Euronext Market Solutions. Tom Richardson, a trading executive with Citi, became its president in November of 2006.

In today’s statement, the BSE said the electronic trading venture struggled “to gain market share in large part due to the overall strength of market participants.”

The closure of Boston’s e-trading venture only nine- months after launch in December of 2006, raises questions about other upstart competitors can go up against such behemoths as the NYSE Euronext and The Nasdaq Stock Market.

Like other floor-based regional stock exchanges (i.e., Philly, Chicago) that teamed up with strategic partners to automate equities trading in response to Regulation National Market System (NMS). Since Reg NMS requires brokers and other market participants to route orders to electronic venues displaying the best price, the theory was that it could level the playing field between the smaller regionals and the dominant exchanges.

But while the BeX is shutting down, other regional exchanges are doing well. Yesterday, the Chicago Stock Exchange (CHX) reported that August monthly trading volumes were the highest since the February 2007 launch of the new CHX trading model. CHX's average daily volume for August was almost 40 million shares, with a daily high of 54.5 million shares.

The BeX closure is also a sign that Wall Street firms that are backing these e-trading ventures are willing to pull the plug if they don’t grow liquidity in a reasonable amount of time.

One blogger on the Finextra site pointed out that this does not bode well for electronic ventures such as Project Turquoise, Instinet’s Chi-x and Equiduct that were formed to capitalize on the new European trading rules under MiFID. The blogger said these neophytes could pose less of a threat to the London Stock Exchange than was otherwise forecast by Nasdaq in its aborted takeover of the LSE.

According to the BSE, the closure of the BeX will affect 40 employees out of the total of approximately 100 employed by the BSE. Some will be reassigned to other BSE ventures, some will remain on through the transition and those who lose their positions will be offered severance packages.

While this particular venture did not gain enough traction, in its release, the BSE points out that BeX is one of three ventures, including the Boston Options Exchange (BOX) and LeveL ATS, it launched over the last three years. In fact, LeveL, a dark-book alternative trading system that was originally incubated by the BSE is continuing to experience dramatic growth has plans to expand its operations.The same five Wall Street firms that are investors in BeX are also investors in LeveL. According to a BSE spokesman, "Both LeveL and BOX are finding opportunities there and they’re flourishing due to the recent market volatility."

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