Competition between Exchanges: Euronext versus Xetra

Exchanges in Europe are in a process of consolidation. After the failure of the proposedmerger between Deutsche Börse and Euronext, these two groups are likely to become the nuclei forfurther mergers and co-operation with currently independent exchanges. A decision for one of thegroups entails a decision for the respective trading platform. Against that background we evaluatethe attractiveness of the two dominant continental European trading systems. Though both areanonymous electronic limit order books, there are important differences in the trading protocols.We use a matched-sample approach to compare execution costs in Euronext Paris and Xetra. Wefind that both quoted and effective spreads are lower in Xetra. When decomposing the spread wefind no systematic differences in the adverse selection component. Realized spreads, on the otherhand, are significantly higher in Euronext. Neither differences in the number of liquidity provisionagreements nor differences in the minimum tick size or in the degree of domestic competition fororder flow explain the different spread levels. We thus conclude that Xetra is the more efficienttrading system.