Maintaining Market Share

While exchanges are scrambling to go global, they also are fighting to keep their market share in their core U.S. equity trading business. "What's troubling overall for exchanges is how much market share they are losing to the other venues that are innovative technology venues," says Bailey. While there's been an overall pie growing in terms of volume, "We've seen relatively strong growth in the alternatives -- the dark pools -- competing with the exchanges."

To compete with the dark pools, "There've been some strategic moves on the part of NYSE and Nasdaq -- they saw what they needed to do to survive," Bailey says. For example, NYSE Euronext was due to launch NYSE Matchpoint, a point-in-time crossing network for portfolio-based trading.

However, many sources note that Nasdaq also has been stealing volume from the NYSE, which now has just a 60 percent market share in its own listed stocks while the other exchanges control 20 percent and the dark pools have 15 percent. To recapture some of the order flow that it's losing to Nasdaq and ECNs such as DirectEdge and BATS ECNs that pay aggressive rebates to traders, effective Oct. 1, the NYSE changed its pricing model for both NYSE Arca and NYSE Hybrid.

But "Economics is only one piece of the equation," contends AES' Galiametdinov. "You also need to have good technology and liquidity. ... What's important to traders is liquidity, speed and performance in terms of stability. The venue has to be stable."

Nicholas Applegate's Chapman agrees. "The exchanges that are going to win are the ones that have technology behind them, that are going to be the fastest, most stable ... and provide access to equities, derivatives or fixed income."

Given that technology is one of the success factors, many observers say the winning exchanges will be those that simplify their trading platforms and provide access into all their products.

"Think about the proliferation of alternative venues globally. Not only do firms trade globally and in other asset classes, but they also spend on connectivity to an expanding number of venues," notes AES' Galiametdinov. "An exchange that provides a single point of entry would be a great help, and that would be a success factor."

As for which exchanges will be the winners in 2008, sources tend to agree that the two main rivals, NYSE Euronext and Nasdaq are on the short list. "They have the pieces to the puzzle," says BNY ConvergEx's Cangemi, referring to NYSE Euronext. "The sooner they get the pieces together and the faster they can make those pieces harmonize, the more out front they will be."

Similarly, Nasdaq's partnership with OMX puts it on the same track as the NYSE, suggests Cangemi. "Though OMX does not have the breadth of trading of Euronext, the infrastructure that it has to support these markets gives Nasdaq the opportunity to branch out and compete on a global level. It's not about an overnight issue. It's about how fast they can transition," he continues. "To say that the NYSE is not a clear cut front runner is short sighted, but to say there is not significant competition out there is also short sighted."

On the other hand, with the closure of the Boston Equity Exchange (BeX), and the sale of the BSE's assets to Nasdaq, there is speculation that regional stock exchanges aren't going to survive. "Regional stock exchanges are in serious trouble. Boston is an example," says Aite's Bailey. "That whole play up to Reg NMS and the volume they are going to get is not proving to be anything."

In the end, analysts, traders and brokerage executives are predicting more consolidation ahead for exchanges. "I don't know if there will be three or five survivors," says BNY ConvergEx's Cangemi. "The way it looks, five may be surviving and three may be critical."