The competitive nature of the European equity market continues to become more evident. Last week, Nasdaq OMX announced the closure later this month of its European trading platform while the London Stock Exchange and Bats Europe crossed swords over high-frequency traders.

The closure of Nasdaq OMX Europe, known as Neuro, was not unexpected - the multilateral trading facility had attracted just 0.8% of the European market 18 months after launch, according to Thomson Reuters. This is a fraction of its rivals Turquoise (2.8%), Bats Europe (5.5%) and runaway leader Chi-X Europe (18.4%), which, unlike Neuro, had clients signed up as shareholders from day one. Neuro was wholly owned by the US exchange group. Charlotte Crosswell, the chief executive of Neuro, said: "We were determined to make this work and did everything we could to make it work. Looking back, maybe we could have mutualised the business earlier and brought on some of the main liquidity providers, an approach some of our rivals adopted." Brian Gallagher, managing director, electronic trading at Morgan Stanley, said Nasdaq OMX's decision was "no surprise", adding: "This is a competitive landscape and the European equities market is obviously entering a phase of consolidation given volumes are still down on 2007 levels." Gallagher went on to draw parallels with the US where a number of alternative trading systems emerged about 10 years ago only to be forced out of business or into the arms of their larger exchange rivals by the implosion of the tech bubble. He said: "If European volumes were to pick up there may be room for more trading venues to move into profitability but, like in the US between in 2001 and 2003, the new entrants are struggling because volumes have dropped off." Richard Semark, head of client trading and execution at UBS, said timing might have been an issue. He said: "Given Nasdaq OMX Europe came to market after its main rivals it was always going to be harder for them to grow market share but it is a shame they've decided to close the business because the market needs competition." Neuro launched in late October 2008, months after Chi-X Europe, weeks after Turquoise and just one week before Bats Europe. But Gallagher does not believe the demise of Neuro will hurt competition. He said: "There were too many MTFs so consolidation is not necessarily a bad thing. I think three alternatives are enough to keep the exchanges competitive and client focused whereas any more increases the complexity and cost of trading in the market." The three alternatives are Turquoise, which was bought by the London Stock Exchange in February, and Chi-X Europe and Bats Europe, both of which are owned by consortiums of investment banks and high-frequency trading businesses. In another sign of growing competition, the LSE and Bats Europe fell out late last month over the UK exchange's plan to start offering special rates this week to high-volume trading firms, including proprietary trading desks and the HFTs. Bats Europe operates the "maker-taker" fee model - a tariff structure that pays firms for supplying liquidity and charges those that take it - and this model has contributed to Bats' European success among the HFTs. This has, in turn, attracted other trading firms. The LSE adopted maker-taker in September 2008 but chief executive Xavier Rolet quickly dropped the tariff when he took over in May last year, arguing that it benefited HFTs over the investment banks. When the LSE announced its new package for HFTs late last month Bats responded by issuing a note to customers entitled Paternoster Panic - a reference to the LSE's home in Paternoster Square. It read: "Back in August 2009 Xavier Rolet said, 'Maker-taker pricing relies on the concept that posting a passive order is a superior, more valued kind of liquidity. We believe that passive and aggressive orders are equally valuable. We do not want to favour one type of client over another'." Bats Europe went on: "We can't help but ask what has changed in the meantime, other than the LSE's continued loss of market share, now regularly less than 50% of the intraday volume in FTSE 100 securities." A spokesman for the LSE admitted last week: "Market share is a factor. We are committed to remaining competitive and responsive to the requirements of all our customers." The LSE's share of UK trading has been falling steadily over the past two years and last month hit a record low of 51.3% compared with 87.7% in April 2008, according to Thomson Reuters. But the LSE insisted the exchange had not performed a U-turn. The spokesman said: "This is not a return to the maker-taker model favoured by the MTFs. We are not taking fees from aggressive liquidity providers and paying rebates to passive providers; rather we continue to offer a flat charge." He said HFTs were "increasingly important liquidity providers in the current trading landscape", adding: "The changes to the tariffs are partly an attempt to attract more liquidity from high-frequency trading firms as well as reward existing clients who place significant volume with us." Research published a month ago by the consultancy Aite Group suggested that HFTs' market share was growing fast in Europe and that these firms would account for 44% of all European orders by 2012. Semark said: "The LSE changes shouldn't make a huge amount of difference to UBS - we might see fractional cost savings. But it is encouraging the LSE has devised a structure that should attract high-frequency traders without hurting its traditional customers." Gallagher said: "The LSE's pricing change suggests we are going to see further competition in pricing models and, possibly, a price war among the trading venues." But he questioned whether the LSE's move would work. He said: "I doubt any pricing changes, either from an MTF or exchange, are going to find many high-frequency firms waiting in the wings who will be persuaded to start trading by this change, given that clearing costs are their biggest challenge."