LONDON - The London Stock Exchange bought a majority stake in platform rival Turquoise, giving its owners a well-timed exit, aligning its interests with those of big clients and granting it immediate access to pan-European share trading.
In a well-flagged move, the LSE on Monday agreed a deal to take a 60 percent stake in loss-making Turquoise. The exchange will merge the trading platform with its own dark pool Baikal, to create a new pan-Europe venture.
Since the advent of (new European rules) which allowed the market to be opened up on a pan-European basis, we believe the LSE should trade all European shares, said David Lester, director of information and technology at the LSE.
The LSE currently only offers trading in UK and -- after the purchase of Borsa Italiana in June 2007 -- Italian equities. Turquoise has a 3 percent market share in pan-European trading in both transparent and dark order books, according to Thomson Reuters data.
Dark pools are growing fast as venues for trading shares anonymously away from a traditional stock exchange, but still account for just 1 percent overall.
There is an expectation that European share market volumes will grow to match those seen in the United States, Lester said. Europe currently lags by one fifth. This should be possible due to technological advances, and improvements in clearing and settlements.
We expect a handful of large-scale players will be left standing in the global exchanges game and pan-European consolidation is a key ground to be contested, said Cubillas Ding, senior analyst at Celent.
Turquoise's owners were nine major investment banks who launched the equities trading platform in 2008 in an attempt to reduce trading costs -- particularly on the LSE.
They included trading heavyweights such as Goldman Sachs, Credit Suisse, Deutsche Bank and UBS and were successful in their key objective of reducing fees on the LSE.
Because EU deregulation in 2007 and the subsequent of platforms such as Chi-X and BATS, the LSE has lost its previous UK monopoly and is now at 62.4 percent. Turquoise currently has 5.2 percent.
This step by the LSE represents a faster track (in conjunction with its own organic strategy with Baikal) into alternative trading and execution mechanisms that firms like Chi-X, BATS, ITG and Liquidnet are already offering, said Ding.
In many ways, it's a competitive catch-up situation which the LSE no longer has the luxury to sustain. For Turquoise, this deal represents a longer lifeline that helps them muscle up order flows and the investment it requires to compete.
The LSE said it will gain synergies from merging Baikal with Turquoise. It plans to use Millennium IT, the outfit it purchased in September, to provide technology for its new unit, which will be standalone operationally.
The LSE said it agreed to fully fund the cash needs of the new venture for the first two years following completion of the deal and intends to bring the business to sustainable profitability.
The LSE will incur exceptional costs of up to 20 million pounds ($32.4 million) resulting from the deal in the current year, reflecting the cost of restructuring and integration. In 2008, Turquoise made a pretax loss of 15.7 million pounds ($25.4 million).
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(Editing by Mike Nesbit)