1. Jerry Avenell, VP Business Development
Chi-X Europe Limited
European equity market fragmentation:
One year on from MiFID
Jerry Avenell, VP Business Development
January 2009

2. Which Route do we take?
First there was the long straight road to the primary exchange

3. Inefficiencies of the Incumbents
"Nasdaq was an incredibly costly provider. They sucked down all that tape revenue, and their equipment was old and clunky" (Analyst, Celent Communications)

4. ECNs "America sneezes…" 1969 Instinet founded
Consolidated Tape System introduced
1997 Instinet becomes the first Electronic Communication Network (ECN) to be recognised by the SEC. Other major players include Archipelago, Brut and Island
The emergence of ECNs offers traders greater speeds at lower costs, in addition to anonymity
2001 Up to 40% of the volume in NASDAQ listed shares being traded on ECNs
NASDAQ launches SuperMontage trading platform in response to competition
ECN Archipelago gains stock-exchange status under the name of ArcaEx
Island ECN acquired by Instinet to form INET
INET taken over by NASDAQ
Merger between NYSE and ArcaEx
ECNs

5. US Equities: November 2008 Volumes
Total ADV = 10.6 Billion Shares (-13%)

6. Different reasons for European fragmentation
Regulation
Currency
Culture
Technology

7. Incumbents Response To Change
“The test for MiFID will be whether competition will increase liquidity and efficiency. The risk is that the benefits of competition for investors will be lost to the increase in fragmentation.
Wider spreads and an increase in the cost of trading and the cost of market data would undermine the whole aim of MiFID….”
Source: Financial News quoting LSE CEO Clara Furse speaking at FESE Conference June 2007 7

9. Exchanges v MTFs – What’s the difference?
RIE (Listing function)  No
Market data fees
Technical costs
Membership fees
Complex trading tariffs
Closed Communications network
Pan European trading
Pan European clearing
Obligated Market Making
No (except TQ)
Heavy duty rulebooks

10. Out with the old….

11. In with the new…Chi-X’s Value Proposition
Technology
Capacity
Connectivity options
FASTER
Lower trading costs
Free market data
Lower clearing costs
CHEAPER
Visible & non-displayed order types
Simplified trading process
Smart Order Routing
SMARTER

12. Smarter Connectivity Options
The diagram below shows the various connectivity options that are available as of December 2008
Following the migration of Chi-X’s primary data centre, participants will have the option to co-locate with Equinix
Round trip latency in all cases

13. Speed: Roundtrip Latency By Venue
Chi-X internal latency is 550 microseconds
Trading Venue
Average Latency
(milliseconds)
Chi-X Europe Ltd
5 (third-party extranet)
3 (leased lines)
1 (proximity hosted)
LSE SETS 14
Deutsche Börse Xetra 37
Euronext 75
OMX
137
Borsa Italiana
174
SWX
284
SWX Europe
291
Source: Internal system performance measurement statistics for average DMA order messaging in November 2007, supplied by Chi-X trading participant. These internal figures are for round trip latency message acknowledgement based on sending an average number of messages to the exchange system and obtaining a response back to the participant's system over the course of a normal trading day.
Please note: These figures are provided for illustrative purposes only and are not intended to represent an independent performance measure of latency.

14. More Capacity = Faster Trading, No Time Lag
Chi-X can currently handle up to 115,000 messages per second without a degradation in latency
At its peak on 14th November, the number of messages handled per second (31,091) was around 41% of the total capacity
A peak market data output of 40,953 messages per second occurred on the same day = 14

15. Trading Tariff Trading fees on Chi-X
The Chi-X business model is based on the principle that the user pays only for services consumed
Trading fees on Chi-X
Aggressive execution fee bps
Passive execution rebate bps
Order entry, amendments & deletions no charge
Membership & application no charge
Market data FREE
OTC trade reporting (optional) £210 pcm
Aggressive execution
Order hits Chi-X order book and immediately results in execution
Passive execution
Order is placed on Chi-X order book and executed as a result of being hit by an incoming order

16. Order Types on Chi-X Order types permitted Chi-X LSE Deutsche Borse
Euronext
SWX
Europe
Limit 
Market
Iceberg
Execute or Eliminate
Fill or Kill
Hidden* No
Mid Peg*
Primary Peg*
*Hidden, Mid Peg and Primary order types are not available on many of the existing European exchanges

17. Simplified Trading Process
Chi-X offers a simplified trading process and uniform, straight forward pricing across European securities markets
Flat rate for both execution and clearing throughout Europe and flat rate for settlement which varies by market
Clearing performed by EMCF across European Markets
Traditional Trading Process
Chi-X Trading Process
Trading Participant
Domestic
CSD
Execution
Settlement
Clearing
Trading Participant
Other
Marketplaces(1)
Ltd SA
Respective
Clearing Agent(1)
Agent(1)
Note: EMCF is a full service clearing provider across European markets
(1) Each marketplace has a separate and distinct trading process

18. Cheaper: EMCF Clearing Fees
EMCF has introduced further fee cuts with effect from 1st August 2008
All clearing fees are stated in Euros
Market
Initial fees
1 October 2007
1 March 2008
1 May 2008
1 July 2008
1 August 2008
Overall difference
Netherlands
0.30
0.28
0.19
0.14
0.10
0.05
-83.3%
Germany bp bp
-80.0% UK
0.18
0.17
0.15
0.12
-72.2%
France
n/a
-82.1%
Switzerland
0.08
-50.0%
Scandinavia
-73.7%
Internal / Self
0.03

19. Results: Market Share Growth by Market
Market shares are by market rather than by index
Market share: % of Combined Primary Exchange & Chi-X Turnover

20. Market share highlights

21. Cheaper: Basis Points Savings on Chi-X
Average basis points improvements in December were 3.59 bps
Total price improvement savings in Q4’08 were just under €60 million
(1) Represents percentage of trades executed on Chi-X that are inside the spread of the primary market
Execution Savings on Chi-X
Chi-X Results
(1)

22. European Order Book Volumes
Value of Equity trading, October 2008
Exchange / MTF
Order Book Trades
Order Book Turnover € 1
NYSE Euronext
23,619,285
257,330,000,000 2
Deutsche Borse
14,507,972
243,740,000,000 3
London Stock Exchange
21,389,300
219,570,900,000 4
Spanish Exchanges (BME)
4,249,194
119,009,300,000 5
Chi-X Europe Ltd
14,288,749
109,157,247,286 6
SWX Europe
4,290,604
92,880,600,000 7
Borsa Italiana
6,979,379
72,875,300,000 8
Nasdaq OMX Nordic Exchange
6,113,982
69,942,100,000 9
Oslo Bors
1,563,760
16,937,500,000 10
Wiener Borse
723,204
5,874,000,000 11
Athens Stock Exchange
1,108,738
5,405,100,000 12
Warsaw Stock Exchange
1,105,139
4,668,000,000 13
SIX Swiss Exchange
648,359
4,593,100,00 14
Prague Stock Exchange
129,799
3,367,200,000 15
Budapest Stock Exchange
314,422
2,538,500,000
Value of Equity trading, October 2008
Figures sourced from FESE, Chi-X Europe figures inserted for comparison

23. Results: European Order Book Volumes
Value of Equity trading, November 2008
Exchange / MTF
Order Book Trades
Order Book Turnover € 1
NYSE Euronext
14,020,309
136,029,000,000 2
London Stock Exchange
14,460,036
129,585,100,000 3
Deutsche Borse
8,766,787
107,252,900,000 4
Spanish Exchanges (BME)
3,334,569
72,912,900,000 5
Chi-X Europe Ltd
8,573,927
57,158,483,917 6
SWX Europe
2,693,138
49,360,500,000 7
Borsa Italiana
4,349,417
42,657,700,000 8
Nasdaq OMX Nordic Exchange
4,171,811
40,429,900,000 9
Turquoise
2,435,028
19,665,636,989 10
Oslo Bors
1,201,920
11,111,000,000 11
Athens Stock Exchange
781,705
3,273,200,000 12
SIX Swiss Exchange
440,571
3,155,500,000 13
Warsaw Stock Exchange
835,287
2,788,200,000 14
Wiener Borse
378,606
2,447,000,000 15
Prague Stock Exchange
85,176
1,550,200,000
Figures sourced from FESE, Chi-X Europe figures inserted for comparison

24. Fragmentation Illustrated
* Source: Chi-X Europe
**Source: Fidessa Fragmentation Index
Market Share by Venue**
% Market Share**

25. Smart Order Routing
A range of algorithmic strategies can be deployed with a high level of configurability on a per participant basis
A Smart Order Router allows direct gateway connections to multiple destinations
Enables participants to execute against all eligible quotes on the exchange/ MTF when the price is equal or better than the consolidated best bid and offer
Marketable orders can be sent to all eligible destinations
Non-marketable orders can be posted to the participant’s chosen destination
Client
Order
Broker
Smart Router
FIX Gateway
Broker Network
Broker Network
Smart Order
Routing
Other
MTFs/ Exchanges

26. Chi-X Europe Consideration October 2008-January 2009
Smart Order Routing…
Chi-X Europe Consideration October 2008-January 2009

27. Participant A Consideration October 2008-January 2009
As it should be
Participant A Consideration October 2008-January 2009

28. Trading Participant B Consideration October-December 2008
Clearly not working!
Trading Participant B Consideration October-December 2008

29. Smarter: Chi-X’s Response to the F word
On 8th September 2008 the LSE SETS system had an outage. Trading continued on venues such as Chi-X. However most smart routers and automated market making machines were referencing the primary market resulting in reduced trading
Most banks/ brokers/ liquidity providers have said that they are now changing this to reference a consolidated EBBO/ tape
If a primary market goes down some time in the future it is highly likely that trading will continue across the alternative venues that trade those stocks
The LSE outage, coupled with the entrance of MTFs to the market, provides a strong reason for the creation of a consolidated tape. This would prevent a repeat of the problem of traders having no reference prices
Chi-X is currently collaborating with other new trading venues with the aim of developing an EBBO and consolidated tape, planned to launch in 2009
Chi-X is also working with NASDAQ OMX Europe and BATS on a common symbology
Tape A – Primary
Tape B – Primary + MTFs
Tape C – MTFs

30. The importance of technology: Is it an arms race?
MTFs and Exchanges are seen to battle for the coveted status of ‘fastest’
However there is no point having lots of arms in the armoury if they do not function effectively
More can be less in some cases as diminishing returns set in

31. Constant Innovation: Sponsored Access
Sponsored Access will allow the clients of Chi-X Trading Participants to have a direct technical connection to Chi-X
This will minimise latency, which is essential for the growth in algorithmic trading and, as a result, trading volumes
A real time drop copy feed will be provided by Chi-X to the Sponsoring Trading Participant relating to all activity by Sponsored Clients. Other validation checks and controls will also be in place

32. The Future: Consolidation
In the US a consolidated tape was established when NYSE accounted for less than 80% of the flow
The Consolidated Tape System, introduced in the US in 1976, consolidates data from several market centres including NYSE, NASDAQ and AMEX, among others, before distributing the ticker via Multicast
FTSE 100 MTF Market Share
7 November 2008
FTSE 100 Overall Market Share
7 November 2008

33. The Players on the Landscape

34. What does the future hold?
More trading venues are expected to launch in the coming months. MTF fatigue?
Fragmentation of liquidity will increase however this will be followed by a period of consolidation in the market
Algorithms will continue to become more sophisticated and as part of that Smart Order Routing will continue to evolve
However there is still a lot to do and we, as an industry, can work together
Following the launch of Chi-X in March 2007, up to 25% of the UK volume and 15% in other major markets is now being traded away from the Primary market, yet this volume is not being taken into account as part of benchmarks and index calculations
What does VWAP now really mean?
If the primary market is down and trading continues on other MTFs, how will indices update?
Cooperation between venues on harmonised symbology, trading hours and ticks sizes will create standards so that each venue can compete on its own merits

35. “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
Charles Darwin, 1859 35 35

36. Questions?
Thank You 36

37. ©2009 Chi-X Europe Ltd (“Chi-X”). All rights reserved
©2009 Chi-X Europe Ltd (“Chi-X”). All rights reserved. Chi-X is a registered mark. Chi-X Europe Limited is authorised and regulated by the Financial Services Authority.
This information is provided for informational purposes only. It does not take into account the particular investment objectives, financial situation, or needs of any individual or entity. Under no circumstances is it to be used or considered as an offer to purchase or sell any security, or as a solicitation or recommendation of the purchase, sale, or offer to purchase or sell any security. While the information has been obtained from sources deemed reliable, neither Chi-X nor its licensors, nor any other party through whom the user obtains any such information: (i) makes any guarantees that it is accurate, complete, timely, or contains correct sequencing of information; (ii) makes any warranties with regard to the results obtained from its use; or (iii) shall have any liability for any claims, losses, or damages arising from or occasioned by any inaccuracy, error, delay, or omission, or from the use of the information or actions taken in reliance on the information. Reproduction or redistribution of this information is prohibited except with written permission from Chi-X.
System response times may vary for a number of reasons including market conditions, trading volumes and system performance.