Deutsche Boerse XIM exchange seen facing hard road

By Jane Baird

LONDON, Feb 26 (Reuters) - Deutsche Boerse faces a tough battle in its attempt to win back market share from upstart rivals with its new low-cost, pan-European exchange, bankers and industry experts say.

The Xetra International Market (XIM) launched full trading in January with a handful of clients and blue chip stocks from the Benelux countries, France, Finland and Spain, with Italy taking the total to 96 stocks when it gets regulatory approval.

XIM has a tough road ahead, said Sang Lee, managing partner and specialist in market structure at consulting firm Aite Group. 'If they were launching this in 2007 we would be having a different conversation, but there are a lot of venues now where pan-European trading is possible.'

While venues may differ, 'at the end of the day, you have to bring liquidity in. It's a chicken-and-egg problem,' Lee said.

XIM is expected to add 20-30 big trading members by end-March and grow steadily through this year, adding stocks and names from other countries including the UK and Switzerland, said Rainer Riess, Xetra Market Development's managing director.

'It's a competitive marketplace where everybody is trying to deliver a state-of-the art, high-speed, low-cost and innovative solution. Where we are different is that it's a combined offering between cash and derivatives,' he said.

The servers for XIM and the Eurex derivatives exchanges sit next to each other at the same data centre in Frankfurt, and trades from both markets go through Eurex Clearing.

'It is easy to play strategies between the cash underlying and the derivative,' Riess said.

An executive at a big European bank said, however, he had little interest in using XIM for arbitrage without a flow of such trades already.

XIM was the last to enter a crowded market, he said, and while his bank plans to connect to the new platform, it does not not plan to be among the first to trade on it.

'They are not bringing new liquidity to the market; they are further fragmenting it,' he said.

Deutsche Boerse is battling low-cost electronic trading platforms such as Chi-X and BATS after Europe's markets in financial instruments directive (MiFID) opened markets to competition in 2007.

The German exchange's share of cash equity trading in Europe dropped to 12.4 percent in January from 18.1 percent two years ago, while Chi-X, in business for less than three years, saw its share rise to 13.2 percent, according to Thomson Reuters data.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a graphic of European market share, see:

http://link.reuters.com/vud48h

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

BUILDING IN HOUSE

The new exchange faces tough competition as trading platforms cut prices and upgrade technology in a 'constant game of leapfrog', said Herbie Skeete, managing director of research firm Mondo Visione. 'A lot depends on whether their sales force are able to persuade clients to use it.'

Deutsche Boerse says it is slowly building up its XIM platform from within and using its existing sales team, whereas the London Stock Exchange recently boosted its pan-European offering by acquiring Turquoise, Europe's third-biggest alternative platform, or multilateral trading facility (MTF).

'The beauty of it for us is that we are leveraging off our existing infrastructure. It is not costing us any more,' Riess said.

Part of XIM's attraction, he said, is a pricing structure that is designed to target two types of clients. XIM charges 0.12 basis points on trading plus 0.06 basis points for clearing, with no fixed fee.

This pricing benefits high-frequency traders, who execute large numbers of small trades, by keeping their costs predictable, Riess said.

It also appeals to investors who dip into the market less frequently, because the pricing is equal for everyone. 'For the investor who is a liquidity taker it is a highly attractive pricing model,' Riess said.

By contrast, many MTFs pay rebates to so-called liquidity 'makers' for putting bid and offer prices on a platform, and charge fees to 'takers', who trade on those prices.

Deutsche Boerse expects XIM to succeed even though several past attempts to create pan-European exchanges such as the SIX Swiss Exchange's virt-x have come to nothing.

SIX Swiss Exchange Chief Executive Christian Katz was sceptical when asked by reporters at a SIX event on Friday whether he would make a similar move to XIM.

'If we now built our own MTF, such as Deutsche Boerse has done, would that add significant value to our members?' he responded. 'It's questionable.'

Deutsche Boerse is marketing XIM to its 250 existing members in 19 countries, starting with large clearing member firms and high-frequency traders, mostly domiciled in London, he said.

Riess expects to recruit a second wave of German domestic members in the second and third quarters of this year.

'Our expectation is that in a few years' time, trading will concentrate in a handful of European venues,' Riess said.

'We want to have our footprint in the trading of cash (equities), in the clearing space and in the cash versus derivative game, and that's why Xetra International Market for us is a strategically logical step.'

(Editing by Greg Mahlich) Keywords: DEUTSCHEBOERSE/XIM ([e-mail], Reuters Messaging: [e-mail], [phone]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.