Acceptance of MTFs key to handling exchange outages

The European trading community must factor the liquidity won by multilateral trading facilities into trading strategies and indices to enable continuous trading during an exchange outage.
By None

The European trading community must factor the liquidity won by multilateral trading facilities into trading strategies and indices to enable continuous trading during an exchange outage.

An outage at NYSE Euronext’s European markets in Brussels, Amsterdam, Paris and Lisbon, as well as its multilateral trading facility (MTF) NYSE Arca Europe, on 20 April highlighted the significance of this as trading flow dried up and did not shift to alternative venues. The outage draws comparisons to trading behaviour on 8 September last year when an outage that lasted the whole day at the London Stock Exchange (LSE) also did not entice trading flow to MTFs. However, at the time Chi-X and Turquoise – which had barely started trading– were the only MTFs up and running.

Observers have suggested that equity market participants must embrace alternative trading venues in Europe by including the liquidity found on them to compile indices and power algorithmic strategies to help them achieve the benefits of MiFID and reduce concentration risk.

Some brokers blame the fact that many algorithmic strategies are still based on data compiled only from the primary market.

“A lot of the algo strategies, although they smart order route to all venues, still reference the liquidity going through the primary exchange because clients tend to demand strategies that are transparent and easily comparable,” Toby Bayliss, head of algorithmic and program trading, Europe, at agency brokerage Sanford C. Bernstein told

Furthermore, Bayliss notes that the lack of a reference market – where typically 70-80% of a stock’s volume can be found – can make certain strategies unusable.

“Order types on MTFs, such as pegged orders and dark or hidden orders, use the primary exchange as a reference point, so these instantly become invalid,” said Bayliss. “In addition, a significant proportion of liquidity on some MTFs is generated by high-frequency trading models, which often rely on the available liquidity levels on the primary exchanges as well, so those players would limit their activity.”

According to a notice sent to NYSE Euronext participants, the outage stemmed from technical problems related to the processing of data overnight on one of its legacy systems. To allow members time to reconnect their market data applications properly, the opening of Euronext markets was delayed until 09.40 central European time for CAC 40, AEX, PSI 20 and BEL 20 trading, and until 10.00 for NYSE Arca Europe. However, a further short delay occurred just after the markets reopened until 10.20 because of latency issues. All other small- and mid-cap equities were made available at 10.45.

In the event of a future outage, pegged and non-displayed orders would not face this problem if the Financial Services Authority (FSA), the UK’s financial regulator, grants MTFs permission to use a European best bid and offer reference price, instead of sourcing quotes just from the primary market.

“We are urging the FSA to work with the industry and come up with a standard that vendors and data firms can base consolidated products on,” said Hirander Misra, COO, Chi-X Europe.

Misra believes that a “cultural change” is required across the industry to prevent a similar occurrence, with large sell-side firms currently leading this move over buy-side and index providers.

“Some sell-side firms are acknowledging this change but there is still a large part of the industry that isn’t,” he said. “For example, index providers such as Dow Jones and FTSE still only take the data for their constituents from primary market trading activity.”

Alexandra Foster, head of execution and international prime brokerage sales, equities and derivatives, BNP Paribas, contends that the buy-side has become more inquisitive about how their trades are handled and that the timing of NYSE Euronext’s outage was a more crucial factor.

“This was different to the LSE outage as it happened before the open, and therefore before the market had its auction, so people didn’t have an idea of where prices should be. Market participants haven’t wanted MTFs to have auctions and would rather these remain with the primary markets, hence the dependency on the primary pre-market,” said Foster. “If another outage happened flow could switch to MTFs where possible, but it all comes down to timing.”