October 29, 2009 2:00 am

LSE closes in on deal to absorb Turquoise

The London Stock Exchange is closing in on a deal to absorb Turquoise, the pan-European share trading platform, into a new joint venture.

The fate of Turquoise is expected to be sealed within two weeks as talks finalise with the platform's backers, people familiar with the matter said yesterday.

No cash will change hands. Turquoise will be merged with Baikal, the LSE's nascent "dark pool" block trading facility, with the LSE retaining a 51 per cent controlling stake.

The exchange will commit to making a series of investments in the platform to develop technology and new products, over a specified time.

The talks come as the LSE is rushing through measures to try to stem the erosion of its market share at the hands of recently launched multilateral trading facilities such as Chi-X Europe and BATS Europe.

While completion of the deal could yet take longer, the development marks a remarkable end to Turquoise, which was founded two years ago as a rival to the LSE.

Its backers were nine banks that are among the largest providers of orders to the LSE. Angered by the refusal of former LSE management to accede to demand for fee cuts, the banks took advantage of new rules from the European Commission to set up their own share trading platform.

Turquoise is one of five similar MTFs that are battling Europe's established exchanges - and each other. Collectively, such platforms have captured about 43 per cent of trading in the FTSE 100.

However, Turquoise has never been profitable and most of its shareholders, their balance sheets battered by the financial crisis, are unwilling to continue funding the venture.

The shareholders are UBS, Morgan Stanley, Goldman Sachs, Credit Suisse, BNP Paribas, Société Générale, Deutsche Bank, Merrill Lynch and Citigroup.

The arrangement means that the nine banks will no longer have to keep funding the venture, while retaining a stake in the business, which the LSE and some shareholders believe could be expanded into other areas beyond cash equities.

For the LSE, the deal is a way of mending relations with its formerly disaffected customers, a process started when Xavier Rolet, the exchange's chief executive, implemented a new strategy over the summer.

The LSE introduced a new fee structure in September, designed to reward traders who bring the most orders to the exchange. But this has failed to halt a fall in its market share.

BATS Europe, another MTF, has managed to increase its share of FTSE 100 trading with an aggressive pricing scheme. It has almost 8 per cent of the FTSE 100.

Both the LSE and Turquoise declined to comment.

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