New research from TowerGroup finds that major turf wars are being waged in the U.S. and European capital markets as traditional financial exchanges look for growth, trade execution venues adopt predatory approaches to new revenue streams, and new contenders step into the electronic trading arena.

TowerGroup says that next-generation markets are beginning to emerge, challenging existing business models, forcing regulatory change and competing through new combinations of product, technology and cost.

“The four main drivers accelerating market structure changes are technology, regulation, competition and revenue generation,” said Robert Iati, director of the securities and capital markets practice at TowerGroup and author of the research. “Some of these four are exchange-driven, such as growth by Eurex, the London Stock Exchange or Nasdaq. Some are enabled by regulation. And some arise from competition external to the exchanges, such as from software vendors or from activities now being executed in-house by brokers/dealers. Together these four forces are combining to reshape the landscape and the nature of market competition — yielding greater impact together than they would separately.”

Iati noted that apart from pockets of activity including new debt from an expanded Europe, the markets are not growing at a sufficient rate to provide solid revenue increases across the board. “The markets are busy expanding and encroaching into each other’s spaces, and that means the industry will see increased predatory behavior,” he said.

The research also suggests that the revenue models for the major exchanges are now severely challenged, as they all rely on listing, trading and market data as the core of their income model. It also predicts that the way technology is used by markets internally and in the delivery of products will increasingly drive the markets’ ability to be profitable. In addition, broker/dealers will sharply increase their acquisitions of technology products — not only in the trading or risk-management arenas but also in any part of the process in which ownership is important for a competitive edge.

The firm also predicts that the precision of the pre-trade environment will assume much greater importance than the execution itself, as new technologies bring higher levels of intelligence and sophistication to the execution process. “Execution will soon become precision surgery, with three major consequences. First, the ability to determine best execution will lie in technology upstream of execution venues, making these tools even more critical to maintaining a competitive edge. Second, the value of the execution will basically decline to zero. And third, exchange floors themselves will become less obvious as execution venues,” said Iati.

Iati noted that this shift, more than anything else including regulation, will speed the decline of the physical trading floors. “We are already witnessing a drive among brokers/dealers to aggressively seek through acquisition more sophisticated tools to offer to their clients. This is evidenced by Bank of New York’s purchase of Sonic Trading and Citigroup’s purchase of Lava Trading,” he added.