London Stock Exchange CEO Xavier Rolet has admitted that predecessor Clara Furse made a mistake in adopting maker-taker pricing last September and has vowed that the exchange will not differentiate between types of liquidity in future.
“Maker-taker pricing relies on the concept that posting a passive order is a superior, more valued kind of liquidity. We believe that passive and aggressive orders are equally valuable,” Rolet told theTRADEnews.com.
The London Stock Exchange introduced rebates for market participants that post liquidity on 1 September 2008 in a bid to boost trading volumes, particularly from high-frequency, statistical arbitrage traders. But at the beginning of July – barely six weeks after Rolet replaced Furse – the exchange announced that a new fee schedule, which comes into force 1 September 2009, would remove the rebate. Under the new fee structure, the LSE will charge 0.45 basis points per trade for the first £2.5 billion of value traded, 0.40 bps for the next £2.5 billion, 0.30 bps for the next £5 billion and 0.20bps for all subsequent value traded.
Rolet suggested that the original decision to offer rebates had helped its competitors, which include multilateral trading facilities such as Chi-X, BATS Europe and Turquoise, because it had helped to reward the trading strategies of stat-arb firms that trade heavily on the newer exchanges, thereby boosting their market share levels.
“If you’ve got a 3% market share and seek to increase that, it makes sense to pay for order flow. If you’ve got 75-80% it doesn’t,” said Rolet.
The LSE’s share of trading in FTSE 100 stocks has varied between 60-65% in recent weeks, according to data from Thomson Reuters and the Fidessa Fragmentation Index.
Rolet said that the exchange would aim to bring down the price of execution for all market participants to stimulate trading volumes.
“The only way you can have a stable venue that manages the conflict between the needs of buyers and sellers in the long term is if that venue is neutral,” said Rolet. “We want to be neutral, and that must be reflected in our fee schedule. We do not want to favour one type of client over another.
“Arbitrageurs bring a lot of liquidity but we do not want to feed their model at the expense of our other clients. We simply say to all comers: the more business you give us the bigger your discount.”
Rolet said the exchange intended to make further reductions in fees following the major technology overhaul scheduled to start during the second half of this year. The LSE is widely expected to replace its TradElect trading platform, which went live in 2007. Rolet took soundings from a number of the exchange’s clients following his appointment earlier this year to ensure the exchange’s strategy more closely matched their requirements.
“We’ve said to clients, ‘we are conscious that you want us to reduce our fees and we’re reducing them; our IT needs upgrading and we’re going to upgrade it’. There is a cost and a challenge to replacing technology that’s five or six years old, but can we source and run our technology more cheaply than we do now? The answer is yes.”
According to Rolet, the exchange’s annual technology spend is currently running at £164m.
“It might take us six months to a year but we’ll come out on the other side with a core anchor for our trading businesses that is much more scalable and much cheaper to operate,” he said. “This is why it was important to send a message with a first round of fee cuts.”
Rolet also confirmed that the exchange’s UK cash equities business would over time migrate to from value to volume-based pricing, in line with current practice on its Italian equities platform.
Future reductions in LSE clients’ transaction costs may also emerge from the ongoing development of the firm’s post-trade capabilities. The LSE was the first ‘incumbent’ European exchange to offer a choice of clearers, when SIX x-clear was added to LCH.Clearnet, a decision for which Rolet says predecessor Furse did not get enough credit.
“We intend to increase the scope of our clearing business,” he said. “We need to regain the initiative and find a way to offer our clients more choice, and this could also help to reinforce our cash equities business.”
In the reorganisation of the LSE’s businesses implemented by Rolet earlier this year deputy-CEO Massimo Capuano was given responsibility for the firm’s post-trade operations.
LSE bought Monti Titoli, the Italian central securities depository, and Italian clearer Cassa di Compensazione e Garanzia (CC&G) when it acquired Borsa Italiana in 2007.