Even as global exchanges compete aggressively to offer lower fees and faster trading speeds, exchange operators will ultimately profit most by offering specialized products for derivatives, dark pools and other types of trades, a top Chi-X Europe Ltd. executive told Dow Jones Newswires.

"All these innovations will be the key differentiator" for established exchanges, as well as the multilateral trading systems like Chi-X Europe, said Hirander Misra, Chi-X Europe's chief operating officer.

Recently launched products, such as ones for dark pools or which provide more access to liquidity, will be key drivers of profitability for Chi-X Europe, Misra said.

Meanwhile, the competitive advantages of quicker and cheaper trading will be erased as all exchanges become capable of offering the same pricing and speed through better technology and economies of scale.

"Most systems will converge and timing will all go to sub-milliseconds. At that point, speed becomes less important," Misra said. "We are a for-profit business, so prices can't be erased to zero."

Chi-X Europe and other alternative trading platforms emerged two years ago in the wake of Mifid, or the Markets in Financial Instruments Directive, through which the European Commission eased some trading rules. While they were created in part as a means for brokers to pressure established exchange operators on pricing, they have been slow to gain popularity as crisis-wary investors have traded less globally on all exchanges.

Chi-X Europe's Misra offered his view on the future for exchange operators as Chi-X Europe edges into the black for the first time since its launch two years ago. "We are rapidly approaching profitability," Misra said, and "are very bullish for the fourth quarter."

Like several other so-called "alternative" trading platforms, Chi-X Europe has thus far built its strategy largely around offering lower fees and faster trading than traditional exchanges. Established operators like Germany's Deutsche Boerse AG (DB1.XE) are in turn now cutting prices and trying to speed up trades to stay competitive with the alternative exchanges.

Misra said dark pools, offered through Chi-X Europe's "Chi-Delta" product, were beneficial for customers despite broader concerns from established exchanges and regulators about transparency. So-called dark pools are electronic trading venues where large blocks of shares can be traded anonymously. The platforms aren't required to report pricing and volume.

Currently about 50% of Chi-X Europe's trading volume is being taken away from established exchange operators, while the other half comes from new issuance and U.S. based brokers, Misra said.

Just two years after launching, Chi-X Europe has become the fifth-largest exchange by equity trading volume in Europe, behind the leaders, London Stock Exchange Group PLC (LSE.LN), NYSE Euronext (NYX), Bolsas y Mercados Espanoles SA (BME.MC) and Deutsche Boerse.

Chi-X Europe, which is owned by a consortium of investment banks and hedge funds that use it to trade, has also faired much better than rival alternative exchanges, which have failed to gain traction in the highly aggressive market.

The alternative platform BATS is at present only profitable in the U.S., while Turquoise has hired UBS AG (UBS) to help it find a possible buyer amid low trading volume and losses. Analysts are skeptical that Turquoise's owners will find a buyer for the platform.

"It's expected there will be some consolidation in this space," Misra said. While new markets are opening for exchange operators, "the pie isn't big enough to sustain all of the exchanges as well as the MTS."

Other alternative trading platforms are less significant rivals for Chi-X Europe than established exchange operators, Misra said. "That's where the key market share gains are for us."

He also sees Chi-X Europe competing more on primary listings in the next five years, in part because of the high cost of primary listings and changing views on the importance of a primary listing. "More and more of activity is done away from where the primary listing is. It is certainly something where the monopoly mindset will change ... and will be fundamental in the next five years."

A sale of Chi-X Europe to another MTS or established exchange looks unlikely for the foreseeable future, even though there may be interest from other exchange platforms and MTS, Misra said.

Chi-X Europe's owners are "very much in it for the long term. From a profit-and-loss perspective, (Chi-X Europe) has had a very positive impact" for them, he said.

Company Web site: www.chi-x.com

-By William Launder; Dow Jones Newswires; +49 69 29 725 515; william.launder@dowjones.com