The Fastest Exchange Wins

As new players enter the field, buy-side traders say speed and technology is what matters most. "What it's going to take is really speed of execution," relates Nicholas Applegate's Chapman. "If somebody's system is faster than another's, I think you're going to gravitate there. That's why Instinet has been so successful with Chi-X," he continues, referring to the Pan-European alternative trading system that Instinet launched in London to take advantage of MiFID. Chi-X is 10 times faster than the LSE and the per-ticket charge is lower for the brokers that sponsor the buy-side trades, Chapman notes. "When the buy-side is implementing trading decisions, "the fastest is better," he says.

"Alternative trading venues are putting the pressure on exchanges to adapt and upgrade their systems quickly [if they don't], there's going to be a grab of volume that they don't get back," says Chapman. "The NYSE is a perfect example. They didn't adapt fast enough and now they're losing liquidity big time. If I'm buying IBM and now I'm getting it on Nasdaq rather than the NYSE, I don't care."

But according to NYSE Euronext executives, the exchange has improved its speed and has plans in place to become much faster. "We've dramatically cut the latency down to about 110 milliseconds from over 200 not that long ago, and our goal is to be sub-10 milliseconds," said Larry Liebowitz, NYSE Euronext's EVP and COO, U.S. Markets, speaking at Lehman Brothers' 5th Annual Financial Services Conference in September.

To reinvent itself, the NYSE has gone more electronic -- 85 percent of trading now is automated -- and it has consolidated the floor from five rooms down to two in a relatively short time. "The floor is a microcosm of the big picture," says BNY ConvergEx's Cangemi. "Now the centralized auction market is just in place to complement an infrastructure that is highly scalable, global in reach and intellectually sound. So it has a very astute business plan built for the exchange functionality of the future."

As a result of the transatlantic merger between NYSE Group and Euronext, U.S. cash equity trading now represents 10 percent of NYSE Euronext's revenues, while 21 percent is derived from derivatives trading and 16 percent from European cash trading. "John Thain has saved the NYSE from shutting its doors," says Aite Group's Bailey. "When they look at the revenues and the money they're making, it's coming out of derivatives."