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By Bloomberg

What would happen if a major European stock market halted trading for three-and-a-half hours?

The New York Stock Exchange’s outage earlier this week did little to disrupt the trading of U.S. shares. In Europe, however, when a primary market experiences a shutdown, trading in those stocks collapses.

Like the U.S., European trading is splintered across many venues, but a series of differences -- including the central role of many nations’ primary exchanges -- makes the region’s markets less resilient. What saved the U.S. on Wednesday was fragmentation: traders could turn to other platforms when the NYSE became unavailable to them.

“Europe is an interesting one because if there’s so much competition, why is it the case that everyone is so dependent on the primary exchange?” said Niki Beattie, a former head of Europe, Middle East and Africa market structure at Merrill Lynch who now runs consulting firm Market Structure Partners Ltd. in London. “One of the reasons for that is competition hasn’t gotten to the same level as the U.S.”

When Deutsche Boerse AG’s Xetra market suffered a 72-minute outage last October, trading in Germany’s largest companies almost evaporated, even though stocks such as Volkswagen AG and SAP SE were available to trade elsewhere.

Western Europe has 34 stock markets, while the U.S. has 11 exchanges and more than 50 private venues where equities can change hands, so -- in theory -- traders in both regions always have an alternative place to trade. That flexibility doesn’t exist in developing markets, such as Saudi Arabia, where all trading has to take place on a single exchange.

Less Resilient

Market share helps explain why European market structure is less resilient. NYSE accounted for 24 percent of U.S. equity trading in June. By contrast, the London Stock Exchange has 66 percent of its home country’s public trading and Madrid has 76 percent, according to data from Bats Chi-X Europe. Bats accounts for 23 percent of all European trading.

Europe also lacks a centralized service that gathers prices from all the different trading venues. Smaller brokers may find it too expensive to pay for feeds from every available stock market. That means they have no recourse when a primary exchange stops working.

“The big problem is that the investors don’t see the pan- European market as a whole because they don’t have that consolidated tape,” Beattie said. “They’re still very much focused on the price reference being the incumbent exchange.”

Traders in the U.S. have access to centralized price feeds known as SIPs, or securities information processors. They’re not perfect -- Nasdaq’s malfunctioned in 2013. And they’re slower than the direct feeds that exchanges provide at great cost.

Far From Reality

Europeans have discussed setting up a centralized price feed, but the project remains far from reality.

The region has yet to witness the intense competition that fragmented U.S. stock trading. In 1975, Congress mandated the creation of a “national market system” linking venues across the country. Regulation NMS in 2007 required that a stock be traded on the market with the best price at any given time.

“People in the U.S. accept that they have to trade on alternatives,” said Rob Boardman, chief executive officer of Investment Technology Group Inc.’s European arm. In Europe, “many firms have policies that they only trade on the primary.”

The European Union has sought to increase competition between venues. In 2007, a package of reforms called MiFID broke the monopoly of established exchanges. Those rule changes enabled Bats Global Markets Inc. and Chi-X to trade European equities.

Gave Up

The two startup markets, which later joined together to become Bats Chi-X Europe, used to call the heads of trading desks when rival exchanges suffered breakdowns, according to two people familiar with the matter. They eventually gave up because traders preferred to wait until the market data from the primary exchange restarted, said the people, who declined to be identified because the conversations were private.

The MiFID definition of best execution for share trades hasn’t obliged every trader to use alternative market venues.

While European equity trading is less fragmented than the U.S., the picture is reversed for clearing and settlement. These processes, which ensure that assets change hands after a trade has been executed, are handled by the Depository Trust & Clearing Corp. in the U.S. As everything clears in the same place, the choice of trading venue doesn’t matter.

In Europe, there are multiple venues. An investor who only trades on Xetra, for example, will clear their trades on Deutsche Boerse AG’s Eurex. They may not even be set up to use the alternative clearinghouses available to investors who trade German equities through BATS Chi-X Europe.