The battle for market share has been escalating in the European equity trading landscape and now there are predictions that not all the multilateral trading facilities (MTFs) will survive.

While some degree of consolidation was expected, the recent experience of Turquoise has caused some observers to move up their timetable for consolidation. Many are expecting a shakeout among the MTFs to happen by the end of 2009.

One of the most high profile platforms, Turquoise MTF, recently experienced a drop in volume in March when its market making agreements with nine major investment banks expired.

According to Deutsche Bank Autobahn Equity newsletter, Turquoise‘s average daily turnover fell by 32 percent in March.
By comparison, Chi-X Europe Ltd., saw its average daily turnover increase by 18 percent in March. BATS Europe's volume increased 26 percent for the month, according to the data compiled by Deutsche Bank Autobahn.

London-based BATS Europe,which was in third place prior to Turquoise’s stumble, has been aggressively picking up market share, and aims to win 10 percent of the volume in the region by the end of the year.

The recent decline in Turquoise volume reflects the complex and fragile relationships that the MTFs have with their liquidity providers.

Turquoise’s liquidity agreements were set up before the deep financial crisis hit the former investment banks, notes a source with another MTF. It’s members are: BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale and UBS have invested in Turquoise to give traders freedom to choose among liquidity venues.

“Turquoise had “guaranteed liquidity” from the get go because of its investment partners,” notes Steve Grob, director of strategy at Fidessa in London who writes a blog about fragmentation. As those agreements come to an end, Grob says Turquoise will have to be more innovative. “They’re now being forced to compete on establishing a differentiated feature of their platform rather than living off the guaranteed order flow from their partners,” said Grob in an interview.

Turquoise’s CEO Eli Lederman has commented in the media that some reduction in volume was expected. As of April 1st, Turquoise announced that it’s improving its rebates, which could benefit brokers that post passive orders for buy-side clients on its order book. In an email announcing the new fees, Lederman explained that banks and brokers use smart order routers to place passive orders on the MTFs as well as on the exchanges they’re trying to replace. Lederman then cited three reasons why he felt Turquoise can benefit participants: “First, most smart order routers today look first to Turquoise to hit a bid or lift an offer because we have the lowest taker fee. Second, we have a number of members who have deployed high-volume, active trading strategies. Third, we have shorter queues, so if you want to post at the primary best bid or offer, it's likely that you'll be closer to execution on Turquoise.”

But the situation is still evolving. Today, Turquoise had 2.52 percent of the overall Pan European securities market share, while BATS Europe had 2.23 percent while the biggest player, Chi-X Europe, had 12.82 percent, according to data compiled by BATS on its Web site.

The question is will Turquoise survive? It’s really too early to count any MTF out. Some experts have pointed out that the MTFs may need to do more than focus on becoming low-cost, high volume trading platforms. Turquoise said it December that it plans to launch a dark liquidity aggregation service that will route to other Pan European dark pools. But if the MTFs are not pushing enough volume, we might see some mergers here, with the traditional exchanges swooping in.