For all the trumpeting last year about electronic communications networks in Europe, they have so far failed to make the same impession in European markets as they have in the US. While they have continued to enjoy success Stateside, in Europe they have to deal with a different animal to Nasdaq: the electronic exchanges.

While this has so far been good news for the exchanges, investment banks have heeded their experience in the US – where ECNs now account for 30% of Nasdaq volume – and joined the bandwagon. This has meant investing heavily in ECNs in both Europe and the US. For Tradepoint, 1999 meant a much-needed refinancing, with an injection of capital from investment banks eager to diversify in line with the upsurge in ECN activity. Since May, the cream of the international securities industry – including JP Morgan, Merrill Lynch and Warburg Dillon Read – has shown faith in the fledgling exchange by joining the Instinet-led consortium backing it. This year it is planning to take advantage of the explosion in European cross-border equities. However, losses for the six months to September 20 eased only slightly – £3.58m (E5.69) down from £3.64m in the six months previously. Richard Kilsby, Tradepoint's managing director, says that this will change in 2000 as the move into European shares will improve profitability. With the future of the alliance of European stock exchanges in question, Tradepoint's cross-border equities trading model looks a credible alternative. Posit, the UK equities crossing network, celebrated its first anniversary in December. "It has been an amazing first year,' says Posit managing director Alisdair Haynes. During 1999 the network processed an average of £960m of orders a day, with about 6% of the orders submitted to the system crossed successfully. In October it exceeded expectations and introduced a third match at 9.30am, which Haynes says is proving a useful source of liquidity when early-morning volumes on the London Stock Exchange are low. This month it will introduce a fourth match. Posit was joined this year by E-Crossnet – another equities crossing system which is solely for the use of fund managers. The network, which was announced in July, is funded jointly by Barclays Global Investors and Merrill Lynch. Managing director Nigel Foster has until July to get the network off the ground. E-Crossnet's main task is to get a critical number of fund managers using the system – which needs to be fast and anonymous, and not allow information to leak into the marketplace. Foster and his team, who are based in London, spent much of the month following the announcement trying to select a technology vendor that could do this. They finally plumped for Bloomberg. It will use much of the technology behind its Tradebook ECN to build the E-Crossnet system. "For us, 1999 was spent establishing the group of participants and selecting the key suppliers – Bloomberg as systems provider and Merrill Lynch for the broker role,' says Foster. "This year we will concentrate on bringing the network into operation.' While many European exchanges managed to stave off the ECNs, they failed to notice the silent revolution another entity was carrying out on their doorsteps. OM Group's presence on the electronic exchange landscape has been bolstered considerably with two major mandates to run electronic exchanges at the end of last year. In December, BrokerTec, one of the alternative trading systems for the fixed income market, announced that it would be using OM's technology to open the first global fixed-income market. OM will supply fixed-income trading stations for US Treasuries and euro-denominated sovereign debt, which will be launched this year. It will also establish and develop the IT infrastructure for the next five years and carry out technical operation of two trading platforms, located in the US and Europe, on behalf of BrokerTec. This latest deal for OM is the culmination of a very good year. It also won a mandate to operate technology for the International Securities Exchange – a new equity options exchange established in New York which will begin live operation in the first quarter this year. In June OM linked the Danish and Swedish stock exchanges on a single trading platform, and it has signed a letter of intent with the Oslo Stock Exchange to join Norex. It has also established BondConnect Europe – a European fixed income trading platform – in co-operation with US bank State Street. If all goes well it will be up and running by the middle of the year. To keep itself busy, it also plans to trade all European equities on the Norex system. Magnus Karlsson Bocker, president of OM Technology, the technology subsidiary of OM Group, says: "By mid-2000 we will launch a single equities trading platform in Europe which nobody else has managed to do, despite all the discussions held between the eight European exchanges wishing to form an alliance. As long as there continues to be slow consolidation in Europe, the competition from ECNs will increase. Effectively, we are an ECN and we can get a single trading platform up and running in Europe before anybody else.' The market, Bocker says, is still so fragmented that it is wide open to competition from ECNs and this year could possibly see entry by some of the US players. Archipelago and Market XT considered moving into Europe in November. According to one source at MarketXT, the company is trying to take advantage of a surge in trading volumes that will occur in Europe. He added that the ECN was looking at strategic alliances with European brokers and exchanges. Optimark is also planning to launch in Europe. In the US, unhindered by electronic exchanges, volumes on ECNs continued to surge in 1999. Instinet, an agency broker as well as the biggest ECN, saw volumes increase from nine billion shares in the fourth quarter of 1998 to 13.5 billion by the second quarter of 1999, with an average daily transaction volume of 170 million. In the same period, Island grew from 4.5 billion shares to almost eight billion with an average daily transaction volume of 136.9 million shares Tradebook from 500 million shares to 800 million and Archipelago from 400 million to 1.1 billion. Other ECNs, with the exception of Attain, all saw exponential increases in their share trading volume. For them, the US market will open up further this year following the Big Board's decision to repeal New York Stock Exchange Rule 390, which prevented members trading pre-1979 listed stocks off-exchange. Today, Instinet, which is expected to be floated off by its parent company, Reuters, has a particularly strong position within the Nasdaq market, accounting for 20% of the volume in Nasdaq's 100 largest stocks. Whether it will be able to retain that position throughout 2000 and beyond is questionable. Since 1997, Instinet has faced growing competition in the ECN space led by upstart Island, which in December exceeded 200 million shares per day. In response, Instinet announced its intention to provide its services to retail customers and to launch fixed-income trading in its network. It also made several strategic investments and partnerships – a 14% stake in online investment bank WR Hambrecht & Co a 16% stake in Archipelago and it is leading the consortium that acquired a 54% stake in Tradepoint. On top of this Instinet has held meetings with Nasdaq and the Big Board regarding possible partnership opportunities. Volumes are upward bound now, but the NYSE's decision to demutualise, and a realisation that US exchanges must be modernised, will keep their success in check. Octavio Marenzi, senoir analyst at Meridien Research, which has studied ECNs, says that ECNs will be a short-lived phenomenon. "Eventually, fully electronic, order-driven stock exchanges will appear in the US. Nasdaq is moving in this direction, as are some of the large derivatives exchanges. "Once Nasdaq or the NYSE move to fully electronic trading systems, the niche that ECNs occupy will disappear. But until this occurs, ECNs will account for an ever-increasing share of Nasdaq trade volume. "This upward ride will be a short one, probably not lasting more than three or four years. Enjoy it while it lasts.'