European tick sizes: a compromise too far?
While the industry has largely applauded last week’s agreement between exchanges, multilateral trading facilities (MTFs) and brokers to harmonise tick sizes across Europe, many acknowledge it is only a first step, and more effort is needed to create true unity.
The agreement, struck on 30 June, whittled 20+ tick-size regimes down to two. The Federation of European Securities Exchanges (FESE), the London Investment Banking Association (LIBA) and four MTFs agreed to standardise price movements for European large-cap indices using tick size-tables drafted by FESE.
Four exchange groups, Nasdaq OMX, Oslo Børs, the London Stock Exchange and SIX Swiss Exchange, will use FESE table two, while Spanish exchange Bolsas y Mercados Españoles, Deutsche Börse and NYSE Euronext will adopt table four. The MTFs – Chi-X Europe, BATS Europe, Nasdaq OMX Europe and Turquoise – have committed to adopt the same tick size tables as the exchanges according to the same timetable and will not make any further tick-size changes before the timetable agreed for each market.
The exchanges will implement the changes within a range of two weeks to six months depending on the needs of their users.
The process has already begun. Chi-X Europe and Turquoise have announced that they will implement FESE table four for constituents of the Belgian BEL 20, the Dutch AEX 25 and AMX 25, the French CAC 40, CAC Next 20 and SBF120, and the Portuguese PSI 20 indices from 16 July, in line with NYSE Euronext. Fledgling Nordic MTF Burgundy has already implemented table two for the most-traded Swedish, Finnish and Danish stocks in its test environment.
Some argue that because the agreement only applies to blue-chip indices, true tick size unity has not yet been achieved.
“We had hoped that FESE would come up with a solution for non-blue-chip stocks and undertake a similar process as they have for blue-chips,” Adrian Farnham, chief operating officer of Turquoise, told theTRADEnews.com. “That would be a major improvement because as it stands we still have a lot of different tick-size tables.”
A further wrinkle is that, in the UK, FESE table two will apply to all FTSE 350 stocks. Because of the wide scope of the index, its constituents have a broader range of liquidity profiles than the other smaller European blue-chip indices such as France’s CAC 40, making a single table is inappropriate.
“The tick tables themselves in general are a pretty good compromise,” said Farnham. “However, we feel that squeezing the entire FTSE 350 into FESE table two is a compromise too far, and we don’t believe that all those names belong in table two. Work is required to come up with a solution for the super-liquid names in the FTSE 350.”
Work on a solution is underway. Before the agreement was reached, the four MTFs and the LSE had shifted to FESE table one for a group of 14 highly-liquid names and the venues are negotiating about whether to keep the arrangement in place. “We (LIBA) have agreed that there probably does need to be an exclusion group of maybe 15 stocks. We are going to come back to the table in a week and a half’s time and agree what that list of 15 stocks are and what their tick sizes should be,” said Andrew Bowley, head of electronic trading product management at investment bank Nomura in Europe and a member of the LIBA committee.
Given the wide time range given for exchanges’ migration to new tick regimes, some MTFs are hoping for a more concrete schedule. “The view from Chi-X and other MTFs is that we would like to have more clarity on the delivery times of tick size changes,” said Graham Dick, head of business development at Chi-X Europe. “The exchanges did commit to providing timetables for their respective markets and we are hoping to see further results after the next meeting on 17 July.”
Nevertheless, market participants stress that the importance of the agreement should not be downplayed. Even if there are still issues to be tackled, the agreement provides the framework to do this.
“The governance of the tick-size regime is more important than the actual level of the tick sizes at this stage,” said Bowley. “We may have actually got the decision wrong in the short term, but if you have got the governance mechanism to manage it then you can revisit it, adjust it, and do so in a collective way rather than leaving it to natural forces, because natural forces will take it in the wrong direction.”
A further positive aspect of the agreement for many is that it was achieved without a push from regulators. “When the tick-size war took place in the US, the regulators had to step in and impose a tick-size regime,” said Dick. “It is positive that in Europe the market has been able to come up with an acceptable solution without regulatory intervention.”
The tick sizes in FESE table two range from €0.0001 for stock prices of €0 to €0.4995 to €10 for prices of €10,000 or more, and increase incrementally for each of the 11 price bands. The tick sizes in table four are less variable across the price bands. Sizes of 0.001, for example apply to all prices from €0 to €9.990, and tick sizes of 0.05 apply to all prices from €100 and above.