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Wednesday, May 09, 2012 8:05:30 AM

Size priority on agenda as BATS-Chi-X evolves

BATS Chi-X Europe could modify one of its dark pools to match orders based on size as the dual multilateral trading facility (MTF) prepares for a new growth phase following its successful technology integration.

Following the acquisition of Chi-X Europe by US-based BATS Global Markets in November last year, the migration of Chi-X Europe onto BATS’ legacy technology platform was completed on 30 April.

The firm now runs four pan-European order books – two lit and two dark – giving it the opportunity to recalibrate its offering for different types of trading strategies.

“We have been talking for a while about changing the model of one of the dark pools we have, for example by introducing a size priority matching logic,” Mark Hemsley, CEO of BATS Chi-X Europe, told theTRADEnews.com. “We are also looking at options for lit pricing to attract different trading participants, which we could do by sliding up and down the maker-taker scale or going for a more traditional taker-taker model.”

BATS Global Markets also operates two US equity exchanges that offer distinguished pricing strategies. BZX offers a maker-taker model, while BYX, which launched in October 2010, offers pricing that rebates members for removing liquidity and does not charge for adding liquidity in order to attract more flow from retail brokers.

As part of the integration of Chi-X, a service first introduced by BATS Europe that enables member firms without smart order routing technology to access multiple markets via the MTF had now been extended to the Chi-X order book.

“We plan to add sophisticated routing strategies that allow market participants to sweep multiple BATS-Chi-X Europe order books before searching for liquidity in external venues,” said Hemsley.

BATS Chi-X Europe accounts for around a quarter of overall pan-European equity trading and represented 32.4% of the region’s dark MTF trading last month, according to Thomson Reuters.

Data opportunities

BATS Chi-X Europe will now seek revenue opportunities from market data. Industry debate regarding market data fees has been rife since the introduction of MiFID in 2007, with domestic exchanges criticised for being slow lower fees.

Exchanges have clubbed together through trade body the Federation of European Securities Exchanges to help progress towards the introduction of a standardised source of consolidated post-trade data and the European Commission favoured a commercial approach to the tape’s creation in its MiFID II proposals last October.

"We are definitely looking at how we get some income for market data, but we are keen to position ourselves so we can help the industry achieve a cost-effective consolidated tape,” said Hemsley. “Exchange market data fees are too high, so we are paying careful consideration to how we price our data relative to incumbent exchanges."

The venue operator is also considering ways to move forward on its equity derivatives service, first initiated by Chi-X Europe last October through a partnership with Russell Investments. The joint venture resulted in the creation of the Chi-X Europe Russell Index series, a collection of European indices across 14 of the continent’s markets that have been designed to become tradable products.

Hemsley is under no illusions as to the difficulty of establishing a European equity derivatives offering to compete with Eurex and NYSE Liffe, the derivatives markets operated by failed merger partners Deutsche Börse and NYSE Euronext respectively.

“The lack of fungibility between different types of derivatives and the integrated trading and clearing infrastructure operated by incumbent markets will make entering this market challenging,” said Hemsley. “Some of our existing cash equities CCPs have indicated that they would clear equity derivatives and we are also in discussions with clearers that we aren’t connected to.”

Further evidence of the task faced by BATS Chi-X Europe can be found with London Stock Exchange-owned MTF Turquoise, which has struggled to gain meaningful traction for its derivatives market since launching last summer. According to Turquoise’s figures, trading in FTSE index options totalled £56.3 million and trading in FTSE index futures reached £2.49 million last month.

Listed derivatives trading could be more competitive under MiFIR, the regulation that accompanies MiFID II. Under the European Commission’s proposals published last October, CCPs would be required to clear instruments regardless of the venue on which they were executed and requires trading venues to accept clearers on a non-discriminatory basis. MiFID II is currently being debated by the European Parliament, with implementation of the revised directive expected in 2014.