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BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

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April 1, 2003

A New Era in Europe: The days of ECNs and crossing networks have come to the continent.

By Joe Kolman

Also in this article

It is the best of times for ITG Europe. The Dublin-based subsidiary of Investment Technology Group, which operates the POSIT crossing network, ended the last quarter with record earnings.

By industry standards, ITG Europe's revenues were modest. Total revenues for 2002 were GBP12.1 million compared to GBP11.5 million (U.K.) for the previous year.

Still, measured on another scale, ITG Europe had a grand time indeed. That's because most stock trading activity, including trades by U.S. investors in European equities, was off.

"We're the tail of the dog," said Gerry Mastrianni, president of GMST World Markets in Orlando, Fla. He estimates that U.S. trades in European stocks have fallen by 40 percent over the past 12 months. "When things are great, we're good," said Mastrianni. "But when things are bad, we're terrible."

Overall, transaction volume by U.S. investors in Europe was relatively good last year, but it was also a dismal period marked by heavy selling activity. U.S. investors, in the fourth quarter, increased their investment in foreign securities.

Net Investments

The amount of foreign equity transactions was $613 billion. That represents a slight decline in gross investments, but a $9 billion increase in net investments, according to the Securities Industry Association.

There was also a slight increase in the same period in net U.S. investor purchases of foreign bonds. Net purchases of European equities in the fourth quarter was also up by one percent.

The largest broker dealers responded to the drop in international equity business. "These broker dealers have been cutting back in the small to mid-cap area, so the only people who can service you tend to be more specialist names," said Clive Williams, head of T. Rowe Price's London trading desk.

The performance of ITG Europe, which operates seven daily POSIT matches for large U.S. and European investors in European equities, is a bright spot in this environment.

What's happening?

For one thing, institutional investors are carefully watching trading costs. Therefore, more large investors are switching order flow over to electronic trading systems and to crossing networks, which typically charge between 7 and 15 basis points. On a full-service arrangement, it ranges from 15 to 25 basis points. The commissions are typically based on the principal value of the trade.

"Some of the business has been picked up by the ECNs, but the place we tend to go to more is the crossing networks, where we get more control over our own destiny," said Williams.

Williams isn't the only institutional investor who's looking for alternatives. ECNs, crossing networks and order electronic systems are becoming more popular among U.S. investors in European stocks. Many of the same firms are also wooing business from European institutions that have had relationships with full-service broker dealers.

Most ATSs and order routing services report that business is up over last year. "The general growth in electronic trading is outweighing any decline that is caused by market performance or market values," said Sanjiv Gupta, director of research and strategy at Bloomberg Tradebook. He estimates that Tradebook's cross-border business grew about 200 percent from 2001 to 2002, and by about 25 percent in the last quarter.