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By Daisy Ku
LONDON, Oct 1 (Reuters) - The London Stock Exchange is in exclusive talks to buy trading platform Turquoise, the centuries-old bourse said on Thursday, as rising competition forces the challenger to throw in the towel.
Turquoise was launched last year by a group of nine investment banks frustrated at the LSE's refusal to cut fees. While loss-making, it gained about a 7 percent market share.
A spate of low-cost rivals pushed the LSE's market share in UK stocks down to around 60 percent.
"Turquoise ... may revert from being a challenger of the LSE to being an actual asset," said David Easthope, an analyst with research firm Celent.
The LSE, under the leadership of recently appointed Chief Executive Xavier Rolet, declined to provide any further details about the possible tie-up aside from saying it had entered exclusive discussions, "which may lead to a transaction".
In August Turquoise told Reuters it would be happy to cede control and that it had hired UBS to seek potential buyers.
Shares in the LSE closed 0.5 percent lower at 851.5 pence, outperforming the FTSE 100 blue chip index, which was down 1.7 percent.
PRICE PRESSURE
Turquoise is one of a dozen or so multilateral trading platforms (MTFs) which have sprung up in the wake of new European Union regulation, and which are offering aggressively cut prices to force their way into markets.
But there remains a question mark over the long-term viability of the business model of such ventures, such as Chi-X, BATS and Nasdaq OMX's pan-European platform.
The LSE's total trading cost is around 3 to 3.5 times that of the alternative trading venues, and Turquoise benefited from the fact that its nine investment bank backers ran their trading over the platform.
But Rolet -- who took over the helm at the LSE in May -- is hitting back, acquiring technology firm MillenniumIT last month in an 18 million pound ($29.6 million) deal, mainly to have access to faster technology.
The Frenchman also seems keen to repair relations with its biggest clients, many of whom are grouped together in the platform that backs Turquoise.
The former Lehman Brothers banker has for instance redesigned the LSE's Baikal dark pool venture into a joint venture with sell-side banks instead of working against them.
Citi, Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley, UBS, Credit Suisse, Deutsche Bank, BNP Paribas and Societe Generale, all back Turquoise.
Turquoise said earlier it had hired UBS to explore options for the future -- including seeking potential buyers. The head of Nasdaq OMX had said it was interested in holding talks with Turquoise or other MTFs.
A deal with Turquoise could lead to the LSE winning round the backers of Turquoise to become investors of Baikal, analysts said. The LSE could also merge Baikal with Turquoise's dark pool.
(Editing by Elaine Hardcastle)