Liquidnet CEO Says Exchanges Should Mimic eBay

NEW YORK (Reuters) – If major exchanges such as NYSE Euronext (NYX.N: Quote, Profile, Research)are going to survive in the long run, they’ll have to turn intoeBay-style companies, shedding brick-and-mortar costs to make tradingcheaper, the head of a leading electronic platform said on Tuesday.

"You got to get out of the physical presence and get rid of a tremendous amount of overhead and look more like eBay (EBAY.O: Quote, Profile, Research),"Liquidnet Chief Executive Seth Merrin told the Reuters Exchanges andTrading Summit, referring to the online auction company. "If you reducethe cost of trading, the axiom is that there will always be moretrading."

Merrin said exchanges’ traditional revenue streams — transactions,listings and market data — have come under attack over the past decadeas advances in technology and rule changes opened the door toalternatives and competitors.

"There’s been a 180-degree change. Before, you had to go to the NewYork Stock Exchange to trade a New York-listed stock or to the NASDAQto trade NASDAQ," Merrin said. "Then in 2000, the ECNs got together andwithin a year and a half, NASDAQ lost 75 percent of its market share."

Electronic communications networks (ECNs) are alternative trading systems that match buy and sell orders among subscribers.

For Merrin, the exchange business is a bad one to be in. With theemergence of electronic platforms, traders have multiple options whenbuying and selling shares. In addition, as exchanges consolidate acrossborders, companies can look beyond national exchanges to list theirshares.

Exchanges also face shrinking margins thanks to increasedcompetition from rivals who have used technology to lower theirtransaction and clearing service costs.

For brokerage firms, one of the major sources of trading business,exchanges have become the last resort, Merrin said. Brokers willgenerally first try to trade on their own internal systems, then turnto ECNs, and finally trade on exchanges only when those methods fail,he said.

Once the biggest customers of exchanges, Wall Street firms haveinvested in their own alternative trading platforms to bypass them.Merrin believes brokers, formerly partners of the exchanges, are nowsome of their toughest competitors.

Wall Street heavyweights such as JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), Deutsche Bank (DBKGn.DE: Quote, Profile, Research), Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research), Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), Citigroup Inc (C.N: Quote, Profile, Research), Morgan Stanley (MS.N: Quote, Profile, Research), Credit Suisse (CSGN.VX: Quote, Profile, Research) and Nomura (8604.T: Quote, Profile, Research) have all invested in alternative trading networks like Chi-X, BATS, and Turquoise.

(Reporting by Steven Bertoni; Editing by Braden Reddall)

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