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Drop in stockmarket turnover prompts innovation to boost liquidity

* Brokers, buy-side interested in new ventures

* Squawker re-introduces one-on-one negotiations

* Aquis eyes telecoms-style pricing structure

* March volumes on STOXX Europe 600 down 37 pct vs 2006

By Simon Jessop and Toni Vorobyova

LONDON, April 17 (Reuters) – Low volumes and weak margins that have depressed trading volumes in equities in recent years have sparked a wave of innovation to revolutionise pricing and inject fresh life into the market.

A decade-long slide in demand for equities, much of it driven by regulatory reform, has been compounded in recent years by the debt crisis turmoil in Europe that has pushed many investors into other regions and asset classes.

Activity on the STOXX Europe 600 index last month, for example, was 37 percent lower than seven years ago.

The shift has made it harder to match buyers and sellers effectively in some trades, participants at the TradeTech conference in London said on Wednesday.

“We are faced with the issue of significant margin compression – a continuing trend that has been in existence for a number of years now – combined with an overall decline in market liquidity. That causes everyone to rethink their business models,” said Ben Springett, head of electronic trading, EMEA at Instinet.

The need for change in the industry is acute and has led to a clutch of mergers between brokerages.

Innovations on offer include Squawker, an online service currently in its launch phase, which is looking to match up sell-side clients anonymously based on their requirements, and then give them the technology to negotiate the trade one-on-one.

Squawker’s “model is there to enable a broker to try and find the other side, so it’s the one that really has immediate value to us,” said David Miller, head of trading at Invesco Perpetual. “We won’t have any direct membership of it … but it’s about moving blocks as efficiently and as anonymously as possible without disrupting the rest of the market.”

Another innovation comes from Aquis Exchange, which aims to revolutionise the pricing system by offering telephone-style subscriptions to clients depending on their level of usage.

Aquis CEO Alasdair Haynes said such innovation should result in higher turnover in the market.

“If you look at any academic papers on telecoms or television business, you see exponential business growth the moment the pricing model changes,” he said.

Better matching of buyers and sellers, which Squawker aims for, could also give the market a fresh boost with small and mid-caps stocks – those that tend to suffer the most from a lack of liquidity – likely to be the key beneficaries.

“If you are a mid-cap Spanish broker and you have a client who wants to do a UK AIM trade, who do you go to for that trade?” Chris Brazier, director and co-founder of Squawker, said, referring to the UK’s alternative stock market for smaller companies.

“We actually introduce you to the person in London who is most likely to be the counterparty to the trade … You are more likely to have the confidence in your broker to do your business, so it could in turn lead to more trading.”

Technology alone, though, can only do so much.

“You use technology to improve functionality, enhance performance and reduce cost. If it reduces friction in the market it will help improve volumes,” said BATS Chi-X Chief Executive Officer Mark Hemsley.

“But ultimately, you still need the underlying retail and institutional investors to want to invest in Europe.” (Editing by Susan Fenton)

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