History Doesn't Repeat Itself, It Rhymes

Abstract

Europe's equity market structure is poised for a dramatic transformation that will parallel changes that have swept the United States during the past several years. Although there are a few key differences between the U.S. markets at the beginning of its metamorphosis and European markets today, these won’t prevent the rapid development in Europe of a market structure similar to that which now exists in America-marked by extreme fragmentation of liquidity, the emergence of dark pools, soaring volumes, and an outsized role for high-frequency traders, such as statistical arbitrageurs and electronic market-making firms. Incumbent exchanges such as the LSE, Deutsche Borse, and Euronext will see their monopoly-like market shares dwindle as new rivals, fueled by superior technology, maker-taker pricing, and big order-flow providers, continue to enter the market. But incumbents will have ample opportunity to benefit from the same trends if they are not complacent. One opportunity, already being pursued by Nordic market operator OMX (now under Nasdaq's ownership) and by NYSE Euronext, is for incumbents to launch pan-European markets that will capture share outside their national borders. And all markets should benefit from a rise in overall volumes similar to that seen in the United States during its transformation.