Chi-X Europe Limited

Jerry Avenell, VP Business Development

January 2009

European equity market fragmentation:One year on from MiFID

2

Which Route do we take?

First there was the long straight road to the primary exchange

3

Inefficiencies of the Incumbents

"Nasdaq was an incredibly costly provider. They sucked down all that tape revenue, and their equipment was old and clunky" (Analyst, Celent Communications)

4

"America sneezes…"

1969 Instinet founded

1976 Consolidated Tape System introduced

1997 Instinet becomes the first Electronic Communication Network (ECN) to be recognised by the SEC. Other major players include Archipelago, Brut and Island

The emergence of ECNs offers traders greater speeds at lower costs, in addition to anonymity

2001 Up to 40% of the volume in NASDAQ listed shares being traded on ECNs

2002 NASDAQ launches SuperMontage trading platform in response to competition

ECN Archipelago gains stock-exchange status under the name of ArcaEx

Island ECN acquired by Instinet to form INET

2005 INET taken over by NASDAQ

2006 Merger between NYSE and ArcaEx

5

US Equities: November 2008 Volumes

Total ADV = 10.6 Billion Shares (-13%)

6

Different reasons for European fragmentation

Regulation

Currency

Culture

Technology

7

Incumbents Response To Change

“The test for MiFID will be whether competition will

increase liquidity and efficiency. The risk is that the

benefits of competition for investors will be lost to the

increase in fragmentation.

Wider spreads and an increase in the cost of trading

and the cost of market data would undermine the

whole aim of MiFID….”

Source: Financial News quoting LSE CEO Clara Furse speaking at FESE Conference June 2007

7

8

9

Exchanges v MTFs – What’s the difference?

Exchanges MTFs

RIE (Listing function) No

Market data fees No

Technical costs No

Membership fees No

Complex trading tariffs No

Closed Communications network No

Pan European trading No

Pan European clearing No

Obligated Market Making No (except TQ)

Heavy duty rulebooks No

10

Out with the old….

11

FASTER

CHEAPER

SMARTER

TechnologyCapacity

Connectivity options

Lower trading costsFree market data

Lower clearing costs

Visible & non-displayed order typesSimplified trading process

Smart Order Routing

In with the new…Chi-X’s Value Proposition

12

Smarter Connectivity Options

Round trip latency in all cases

Client

550 microseconds

Chi-X Equinix Suite

Co-lo1.4 - 2 ms

NetworkServiceProvider

Leasedline

+/- 5 - 7ms

Equinix Service Provision

Connectivity Layer

Order entry

Quotes

+/- 3ms

CHIX MD

Client

550 microseconds

Chi-X Equinix Suite

Co-lo1.4 - 2 ms

NetworkServiceProvider

Leasedline

+/- 5 - 7ms

Equinix Service Provision

Connectivity Layer

Order entry

Quotes

+/- 3ms

CHIX MD

The diagram below shows the various connectivity options that are available as of December 2008 Following the migration of Chi-X’s primary data centre, participants will have the option to co-locate

with Equinix

13

Speed: Roundtrip Latency By Venue

Trading VenueAverage Latency

(milliseconds)

Chi-X Europe Ltd5 (third-party extranet)

3 (leased lines)1 (proximity hosted)

LSE SETS 14

Deutsche Börse Xetra 37

Euronext 75

OMX 137

Borsa Italiana 174

SWX 284

SWX Europe 291

Source: Internal system performance measurement statistics for average DMA order messaging in November 2007, supplied by Chi-X trading participant. These internal figures are for round trip latency message acknowledgement based on sending an average number of messages to the exchange system and obtaining a response back to the participant's system over the course of a normal trading day.Please note: These figures are provided for illustrative purposes only and are not intended to represent an independent performance measure of latency.

Chi-X internal latency is 550 microseconds

14

More Capacity = Faster Trading, No Time Lag

Chi-X can currently handle up to 115,000 messages per second without a degradation in latency

At its peak on 14th November, the number of messages handled per second (31,091) was around 41% of the total capacity

A peak market data output of 40,953 messages per second occurred on the same day

=

15

Trading Tariff

Trading fees on Chi-X

Aggressive execution fee 0.30bps

Passive execution rebate 0.20bps

Order entry, amendments & deletions no charge

Membership & application no charge

Market data FREE

OTC trade reporting (optional) £210 pcm

Aggressive execution Order hits Chi-X order book and immediately results in execution Passive execution Order is placed on Chi-X order book and executed as a result of being hit by an incoming order

The Chi-X business model is based on the principle that the user pays only for services consumed

16

Order Types on Chi-X

*Hidden, Mid Peg and Primary order types are not available on many of the existing European exchanges

Order types permitted Chi-X LSEDeutsche

BorseEuronext

SWXEurope

Limit

Market

Iceberg

Execute or Eliminate

Fill or Kill

Hidden* No No No No

Mid Peg* No No No No

Primary Peg* No No No No

17

Simplified Trading Process

Chi-X offers a simplified trading process and uniform, straight forward pricing across European securities marketsFlat rate for both execution and clearing throughout Europe and flat rate for settlement which varies by marketClearing performed by EMCF across European Markets

Note: EMCF is a full service clearing provider across European markets(1) Each marketplace has a separate and distinct trading process

Traditional Trading Process

Execution

Settlement

Clearing

Trading Participant

OtherMarketplaces(1)

Ltd SA

RespectiveClearing Agent(1)

RespectiveSettlement

Agent(1)

Chi-X Trading Process

Trading Participant

DomesticCSD

18

Cheaper: EMCF Clearing Fees

EMCF has introduced further fee cuts with effect from 1st August 2008

All clearing fees are stated in Euros

Market Initial fees1 October

20071 March

20081 May 2008

1 July 2008

1 August 2008

Overall difference

Netherlands 0.30 0.28 0.19 0.14 0.10 0.05 -83.3%

Germany 0.25+0.075 bp 0.20+0.075 bp 0.19 0.14 0.10 0.05 -80.0%

UK 0.18 0.17 0.15 0.12 0.10 0.05 -72.2%

France n/a 0.28 0.19 0.14 0.10 0.05 -82.1%

Switzerland n/a n/a 0.10 0.08 0.08 0.05 -50.0%

Scandinavia n/a n/a 0.19 0.14 0.10 0.05 -73.7%

Internal / Self 0.03

19

Results: Market Share Growth by Market

Chi-X Average Market Share - UK equities

2.6% 2.7%

4.3%

8.8%

10.2%11.2%

12.2%12.7%

16.7% 16.9%17.8%

17.2%

14.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

Chi-X Average Market Share - Dutch equities

3.9%

5.4%4.8%

6.4%7.3%

8.5% 8.3%

11.0%

14.8%

13.5%14.5%

15.4%

13.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

Chi-X Average Market Share - French equities

1.2%2.2%

2.7%

4.1%

5.8% 5.8%6.7%

10.2%

13.5%

10.9%

12.6% 12.5%

11.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

Market shares are by market rather than by indexMarket share: % of Combined Primary Exchange & Chi-X Turnover

Chi-X Average Market Share - German equities

1.4%2.1% 2.4%

3.8%

5.5% 5.8%

7.5%

8.7%

11.5%

10.1%

9.3%8.6%

9.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-

08

Au

g-0

8

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

20

Chi-X Gross Consideration by Market, December 2008

UK39.65%

Finland1.13%

France21.67%

Belgium0.40%

Germany21.07%

Italy1.16%

Austria0.02%

Netherlands9.83%

Norway0.13%

Switzerland3.41%

Denmark0.14%Sweden

1.39%

Market share highlights

Index Highest Chi-X share

Date

FTSE 100 22.74% 02 Oct 08 ETFs 20.46% 17 Jun 08 AEX 25 19.12% 07 Nov 08 CAC 40 16.12% 20 Aug 08 DAX 30 15.44% 20 Aug 08 FTSE 250 15.28% 19 Nov 08 CAC Next20 10.05% 29 Dec 08 OMX H 25 9.07% 25 Sep 08 SMI 20 7.47% 20 Aug 08 BEL 20 6.79% 01 Oct 08 MDAX 5.68% 18 Dec 08 OMX S 30 5.51% 23 Jul 08 AMX 25 5.41% 22 Dec 08 ATX 20 4.08% 03 Sep 08 OBX 25 3.23% 05 Sep 08 OMX C 20 3.18% 02 Oct 08 S&P MIB40 2.44% 16 Dec 08

21

Cheaper: Basis Points Savings on Chi-X

(1)(1) Represents percentage of trades executed on Chi-X that are inside the spread of the primary market

2.92.7 2.8

2.0 2.0

2.42.7 2.6

3.2

3.6 3.5 3.6

41% 40%44%

51%

43% 42%

36%34%37%

45%47%

53%

0.0

1.0

2.0

3.0

4.0

Jan-08 Feb-08

Mar-08

Apr-08 May-08

Jun-08 Jul-08 Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Savin

gs in b

ps

0%

10%

20%

30%

40%

50%

60%

70%

80%

% o

f Tra

des B

etw

een th

e S

pre

ad

Savings in bps % of Trades Between the Spread

Execution Savings on Chi-X

Average basis points improvements in December were 3.59 bps

Total price improvement savings in Q4’08 were just under €60 million

22

European Order Book Volumes

Figures sourced from FESE, Chi-X Europe figures inserted for comparison

Value of Equity trading, October 2008Exchange / MTF Order Book Trades Order Book Turnover €

1 NYSE Euronext 23,619,285 257,330,000,000

2 Deutsche Borse 14,507,972 243,740,000,000

3 London Stock Exchange 21,389,300 219,570,900,000

4 Spanish Exchanges (BME) 4,249,194 119,009,300,000

5 Chi-X Europe Ltd 14,288,749 109,157,247,286

6 SWX Europe 4,290,604 92,880,600,000

7 Borsa Italiana 6,979,379 72,875,300,000

8 Nasdaq OMX Nordic Exchange 6,113,982 69,942,100,000

9 Oslo Bors 1,563,760 16,937,500,000

10 Wiener Borse 723,204 5,874,000,000

11 Athens Stock Exchange 1,108,738 5,405,100,000

12 Warsaw Stock Exchange 1,105,139 4,668,000,000

13 SIX Swiss Exchange 648,359 4,593,100,00

14 Prague Stock Exchange 129,799 3,367,200,000

15 Budapest Stock Exchange 314,422 2,538,500,000

Value of Equity trading, October 2008

23

Results: European Order Book Volumes

Figures sourced from FESE, Chi-X Europe figures inserted for comparison

Exchange / MTF Order Book Trades Order Book Turnover €

1 NYSE Euronext 14,020,309 136,029,000,000

2 London Stock Exchange 14,460,036 129,585,100,000

3 Deutsche Borse 8,766,787 107,252,900,000

4 Spanish Exchanges (BME) 3,334,569 72,912,900,000

5 Chi-X Europe Ltd 8,573,927 57,158,483,917

6 SWX Europe 2,693,138 49,360,500,000

7 Borsa Italiana 4,349,417 42,657,700,000

8 Nasdaq OMX Nordic Exchange 4,171,811 40,429,900,000

9 Turquoise 2,435,028 19,665,636,989

10 Oslo Bors 1,201,920 11,111,000,000

11 Athens Stock Exchange 781,705 3,273,200,000

12 SIX Swiss Exchange 440,571 3,155,500,000

13 Warsaw Stock Exchange 835,287 2,788,200,000

14 Wiener Borse 378,606 2,447,000,000

15 Prague Stock Exchange 85,176 1,550,200,000

Value of Equity trading, November 2008

24

Fragmentation Illustrated

FTSE 100 Market Share - MTFs*

0%

25%

50%

75%

100%

01/1

0/08

08/1

0/08

15/1

0/08

22/1

0/08

29/1

0/08

05/1

1/08

12/1

1/08

19/1

1/08

26/1

1/08

03/1

2/08

10/1

2/08

17/1

2/08

24/1

2/08

31/1

2/08

07/0

1/09

Chi-X

Turquoise

NASDAQ OMX

BATS

LSE

Market Share by Venue** % Market Share**

* Source: Chi-X Europe**Source: Fidessa Fragmentation Index

25

Broker Network

Smart Order Routing

A range of algorithmic strategies can be deployed with a high level of configurability on a per participant basis

A Smart Order Router allows direct gateway connections to multiple destinations

Enables participants to execute against all eligible quotes on the exchange/ MTF when the price is equal or better than the consolidated best bid and offer

Marketable orders can be sent to all eligible destinations

Non-marketable orders can be posted to the participant’s chosen destination

Client

Order

Broker

Smart Router

FIX Gateway

Smart Order

Routing

Other MTFs/

Exchanges

Broker Network

26

Smart Order Routing…

Chi-X Europe Consideration October 2008-January 2009

27

As it should be

Participant A Consideration October 2008-January 2009

28

Clearly not working!

Trading Participant B Consideration October-December 2008

29

On 8th September 2008 the LSE SETS system had an outage. Trading continued on venues such as Chi-X. However most smart routers and automated market making machines were referencing the primary market resulting in reduced trading

Most banks/ brokers/ liquidity providers have said that they are now changing this to reference a consolidated EBBO/ tape

If a primary market goes down some time in the future it is highly likely that trading will continue across the alternative venues that trade those stocks

The LSE outage, coupled with the entrance of MTFs to the market, provides a strong reason for the creation of a consolidated tape. This would prevent a repeat of the problem of traders having no reference prices

Chi-X is currently collaborating with other new trading venues with the aim of developing an EBBO and consolidated tape, planned to launch in 2009

Chi-X is also working with NASDAQ OMX Europe and BATS on a common symbology

Tape A – Primary Tape B – Primary + MTFs Tape C – MTFs

Smarter: Chi-X’s Response to the F word

30

The importance of technology: Is it an arms race?

MTFs and Exchanges are seen to battle for the coveted status of ‘fastest’

However there is no point having lots of arms in the armoury if they do not function effectively

More can be less in some cases as diminishing returns set in

31

Constant Innovation: Sponsored Access

Sponsored Access will allow the clients of Chi-X Trading Participants to have a direct technical connection to Chi-X

This will minimise latency, which is essential for the growth in algorithmic trading and, as a result, trading volumes

A real time drop copy feed will be provided by Chi-X to the Sponsoring Trading Participant relating to all activity by Sponsored Clients. Other validation checks and controls will also be in place

TradingParticipant

Client A

30 ms 2 ms

order order

TradingParticipant

Client B(Sponsored

Client) 2 ms

order

Drop-copy feed from Chi-X

TP can stop trading

Normal trading

Sponsored access

32

The Future: Consolidation

In the US a consolidated tape was established when NYSE accounted for less than 80% of the flow

The Consolidated Tape System, introduced in the US in 1976, consolidates data from several market centres including NYSE, NASDAQ and AMEX, among others, before distributing the ticker via Multicast

Primary Market 75.6%

MTFs 24.4%

FTSE 100 Overall Market Share

7 November 2008

BATS0.6%

Chi-X 77.0%

Turquoise 22.4%

FTSE 100 MTF Market Share

7 November 2008

33

The Players on the Landscape

34

What does the future hold?More trading venues are expected to launch in the coming months. MTF fatigue?

Fragmentation of liquidity will increase however this will be followed by a period of consolidation in the market

Algorithms will continue to become more sophisticated and as part of that Smart Order Routing will continue to evolve

However there is still a lot to do and we, as an industry, can work together

Following the launch of Chi-X in March 2007, up to 25% of the UK volume and 15% in other major markets is now being traded away from the Primary market, yet this volume is not being taken into account as part of benchmarks and index calculations

What does VWAP now really mean?

If the primary market is down and trading continues on other MTFs, how will indices update?

Cooperation between venues on harmonised symbology, trading hours and ticks sizes will create standards so that each venue can compete on its own merits

35

“It is not the strongest of the species that survive, nor the most intelligent,

but the one most responsive to change.”

Charles Darwin, 1859

35

36

Thank You

Questions?

36

37

©2009 Chi-X Europe Ltd (“Chi-X”). All rights reserved. Chi-X is a registered mark. Chi-X Europe Limited is authorised and regulated by the Financial Services Authority.

This information is provided for informational purposes only. It does not take into account the particular investment objectives, financial situation, or needs of any individual or entity. Under no circumstances is it to be used or considered as an offer to purchase or sell any security, or as a solicitation or recommendation of the purchase, sale, or offer to purchase or sell any security. While the information has been obtained from sources deemed reliable, neither Chi-X nor its licensors, nor any other party through whom the user obtains any such information: (i) makes any guarantees that it is accurate, complete, timely, or contains correct sequencing of information; (ii) makes any warranties with regard to the results obtained from its use; or (iii) shall have any liability for any claims, losses, or damages arising from or occasioned by any inaccuracy, error, delay, or omission, or from the use of the information or actions taken in reliance on the information. Reproduction or redistribution of this information is prohibited except with written permission from Chi-X.

System response times may vary for a number of reasons including market conditions, trading volumes and system performance.