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Fragmented Trading Reaches Oslo

More than a quarter of trading in Nordic equities takes place outside of the listing exchanges, according to Burgundy, one of the multilateral trading facilities competing with Oslo Børs (the Oslo Stock Exchange). In Norway, the trend toward more trade fragmentation is expected to continue.

 Fragmentation had one if its key milestones in 2007, when the European Union opened up for more Multilateral Trading Facilities (MTF) through the Markets in Financial Instruments Directive (MiFID). The main purpose of the new EU law was to increase competition and consumer protection in investment services. As a result, more investors can buy and sell Norwegian equities through MTFs such as Burgundy, Chi-X, and Turquoise, instead of only Oslo Børs.

“The financial markets in Europe are changing rapidly thanks to increased competition between incumbent exchanges and new trading platforms such as Burgundy,” said Olof Neiglick, Burgundy Chief Executive, in connection with the release of 2009 results in January. “The fragmentation has been quite dramatic, with approximately 28% of the trading in Nordic equities now taking place outside of the listing exchanges.”

New Reality
This type of off-exchange trading has slowly been gaining momentum in Norway. It was only in 2009 that these MTFs began to grab a notable market share, according to Ståle Bjørnestad, Head of Capital Markets at Handelsbanken, which is a shareholder in Burgundy and member of Oslo Børs.

“Three things happened last year,” said Bjørnestad. “Burgundy was launched in Oslo, Chi-X got a firmer grip in the Nordic market, and Nasdaq OMX went head-to-head with Oslo Børs.”

Burgundy is a regional MTF for Nordic securities that is authorised and regulated by the Swedish Financial Supervisory Authority. The trading facility is owned by 14 major banks and investment firms in the Nordic region, including Handelsbanken, DnB NOR, Nordea, and Danske Bank.

Its competitor Chi-X operates the largest pan-European equity MTF. It was launched in March 2007, seven months ahead of the MiFID and 18 months ahead of other MTFs. It entered the Norwegian market in June 2008. Chi-X accounted for about 2.6% of all Norwegian equities trading in the Oslo OBX (25 most traded securities in the OSEBX Index), according to the Fidessa Fragmentation Index in March.

The Fidessa index represents only lit venues, i.e. trades done on an order book, and does not include OTC trades. Other market venues for trading in Norwegian listed equities included Stockholm, Turquoise, BATS, and Nasdaq OMX, which was previously together with Oslo Børs until Oslo Børs forged a strategic partnership with the London Stock Exchange Group in 2008. In March 2009, NASDAQ OMX announced its intention to expand its trading offer to include equities listed in Norway, beginning with the 25 largest companies listed in Norway.

This increased competition is good for both investment banks and their customers, who will benefit from the reduced execution, clearing and settlement costs. However, the drawback is the limited liquidity of shares on MTFs operating in Norway compared to Oslo Børs and concerns about the reduced trading surveillance.
“Of course (security) is an issue,” said Bjørnestad. “As a player, we want a market that is transparent and has good surveillance. Chi-X and Burgundy can’t do surveillance as well as Oslo Børs. Plus there is close cooperation between the (Norwegian) authorities and Oslo Børs.”


Oslo Børs accounts for more than 90% of shares traded in Oslo OBX, but faces competition from multilateral trading facilities.
© Oslo Børs/Stein Henningsen

Oslo Børs Still on Top
The MTFs are already among the leading venues in Europe. According to Fidessa Fragmentation Index, Chi-X accounted for 18% of European trades, ahead of London, Paris and Xetra. Fidessa’s figures only include major index constituent stocks and order book trades.

However, fragmented trading has not come as far in Norway as it has in other European countries. Brussels’ BEL 20 was one of the most fragmented markets with only 45% traded on its primary venue in Brussels (24% was from Chi-X), whereas Oslo Børs still accounted for 91% of shares traded on the Oslo OBX, according to the Fidessa Fragmentation Index for the week ending March 12.

Norway has been lagging behind because it is a smaller market, said Bjørnestad. It does not have as many big cap stocks and liquidity is lower than comparable markets in the Nordic and EU countries. But he believes Oslo Børs will face more competition in the future, even possibly reaching levels seen in Stockholm.

Oslo Børs has responded to the increased fragmentation of its home market by lowering prices. Most recently, it announced it would change its fees for shares listed on Oslo Børs and Oslo Axess, the third time it has reduced trading fees for equities since September 2008. In addition, it has made changes to its pricing model to offer bigger discounts and greater flexibility for its customers.

Effective April 1, 2010, Oslo Børs will have no fee for reporting of trades, larger discounts for trading in the five most widely-traded shares, reduction in discount for OBX shares, a discount for cross-trading, larger volume discounts for all shares, changes to the timing for payment of fixed fees, allow market participants to change their choice of fee structure more frequently, and increase auction fees for all shares.

“These further fee reductions are a consequence of the continuing increase in competition for equities trading and our commitment to strengthening our competitive position,” said Bente A. Landsnes, Oslo Børs President. “It is important for us to meet our customers’ requirements, and to respond with changes that will increase their trading activity on our marketplaces. This also reflects our wish to maintain a competitive local exchange, because we believe this is the best way to facilitate future value creation by Norwegian trade and industry.”


Chi-X accounts for 2.6% market share of shares traded on Oslo OBX. Figures are compiled from order book trades only.
© Fidessa Fragmentation Index, report for week ending March 12, 2010

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