After four years in development, the London Stock Exchange’s (LSE’s) core trading platform, TradElect, goes live this month against a background of major changes in the capital markets landscape.

The European Commission’s Markets in Financial Instruments Directive (Mifid), which comes into force in November, has made it easier to set up a trading platform in competition with traditional exchanges, such as the LSE.

And downward pressure on technology prices makes IT infrastructure investments no longer the inhibiting factor that they once were.

Taking advantage of the changes, multi-lateral trading facilities (MTFs) are now offering cheaper trading to compete with the major regulated investment exchanges, such as the LSE, which list companies as well as providing trading services.

One London MTF waiting for Mifid to come into force is Project Turquoise, which has been formed by a consortium of seven leading investment banks and aims to provide trading services at a 50 per cent discount on traditional exchanges.

Formation of Project Turquoise was announced in November 2006 with the aim of launching a pan-European equities trading platform to enhance the current market trading infrastructure in Europe. The seven member banks are Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS.

Project Turquoise has yet to announce which technology partner will build its platform, but the project’s backers say that cheaper technology is a key consideration for the scheme’s viability.

‘The barriers to entry are no longer huge – you can set up a trading platform without a huge amount of financial input,’ said a spokesman for Project Turquoise.

‘The cost of technology has come down dramatically and implementing electronic switches is much easier than it used to be,’ he said.

Critics welcome the rise of MTFs, claiming that traditional exchanges such as the LSE act like quasi-monopolies, with rising trading profits not being passed on to customers. And it is investment banks such as those backing Project Turquoise that are paying those fixed prices.

Comparatively ‘light touch’ financial regulations have helped London cement its position as Europe’s leading financial capital. And if MTFs can be made to work, the extra competitive pressure could help make the City more efficient.

There is also a potentially significant market to exploit. Bats, a US MTF, has gained more than 10 per cent of Nasdaq’s trading volumes in just over a year, after setup costs of only $7m (£3.5m).

Project Turquoise claims its main aim is to improve the efficiency of the market, not just to cannibalise the LSE’s business.

‘A fifth of LSE’s total trading is with the seven banks so we would only be eating into a very small part of their business,’ said the project’s spokesman.

‘We aim to do this at a low cost without profit in mind – and the more profit we make we will pass on as rebates to users,’ he said.

Project Turquoise’s backers may help it avoid at least one of the problems that has scuppered past attempts at launching MTFs – namely the lack of liquid funds, says Gartner analyst Peter Redshaw.

‘Project Turquoise is formed by a consortium of investment banks with a guaranteed critical mass,’ he said.

And the technology infrastructure that was once a competitive edge for a traditional exchange may even turn into a burden.

‘It is often harder to launch a new platform while supporting and integrating legacy systems so there may actually be an advantage in building from scratch,’ said Redshaw.

The changes wrought by Mifid have such significant potential that there is plenty of scope for innovation.

And not all MTFs will be the same. Some, such as Equiduct, plan to run a virtual order book assembling the best bids and offers, providing exchanges with a price comparison service rather like Confused.com does for internet users.

‘The platform will run orders with a bi-lateral agreement for the user guaranteeing best execution without any pinging back and forth around the major exchanges,’ said Redshaw.

But the LSE says if Project Turquoise and its rival MTFs do not succeed in streamlining the trading market, they will do more harm than good.

‘If they do not improve efficiency of the overall system then there is the risk of fragmentation from competing platforms, making the market as a whole less efficient,’ said an LSE spokesman.

‘Ultimately it then becomes no easier for users to get best execution on deals,’ he said.

LSE hopes the launch of TradElect in June will set a new standard for exchange performance because it can process trades so much quicker than in the past.

‘Our strategy is to continue investing to keep using the most competitive and reliable place to do business so that if anyone such as Project Turquoise comes along, then those are the terms upon which they have to compete,’ said the LSE spokesman.