BATS Trading arrived on the European equity trading scene with a strong US reputation preceding it. After launching in 2005, BATS garnered 10.5% of matched share volume across all US stocks within two years.
This is a feat BATS Europe hopes to repeat in Europe as it prepares to go head-to-head with other multilateral trading facilities (MTFs) in the battle for liquidity. Its European offering is now in the final stages of receiving FSA approval ahead of its planned launch in the first week of November.
According to Mark Hemsley, CEO of BATS’ European Markets Division, “the European regulatory environment – combined with broker-dealers who are sick of exchange prices – has created a fertile environment for new trading venues.”
The success of Chi-X – which has recently gained more than 20% market volume in some FTSE 100 stocks – has spurred BATS to set similarly high targets.
“We think it is possible to reach 15% of all FTSE stocks by the end of 2009 but it will take a lot of work,” says Randy Williams, vice president, US sales and global communications at BATS. “It’s ambitious, but our targets are based on conversations with our clients and potential customers, as well as the success of Chi-X. It will be a stretch, but we will try to achieve it.”
Last week’s technical problems at the London Stock Exchange (LSE) indicated the incomplete nature of pan-European competition. Even though market participants were unable to trade on the LSE for the majority of the day, the only up-and-running MTFs, Chi-X and Turquoise, did not benefit significantly from an increase in trading volumes.
“I think this was just because of the relative infancy of MTFs,” says Hemsley. “If Chi-X had been over 50% in some stocks, people would have carried on trading.”
Once market vendors start to offer consolidated European data feeds, says Hemsley, price formation will not be restricted to the primary exchanges and trading flow will be more easily mobilised. “Because Turquoise is so new, there was no reference price from there,” he says. “This meant, that there was no way to triangulate your price. It’s an evolutionary step that won’t last.”
Widespread relief in the financial markets over the US government’s bail-out of mortgage lenders Freddie Mac and Fannie Mae on 7 September meant that exchanges were set for a significant increase of trading volumes last Monday. Market sources claimed the LSE’s trading volumes were 75% above recent levels before Monday morning’s outage. This made the inability to trade even more unpalatable for brokers, who lost millions in potential commissions.
According to Hemsley, the episode further underscores the need for robust trading platforms with the ability to cope with high levels of volatility. “We believe our technology will hold a major advantage for us because it is already battle-tested in the US,” he says. “Our development group works across the US and Europe, which enables us to bring a lot of our US features to Europe, such as sponsored access and onward routing.”
Another of these features is BATS’ low-latency capability. On average, the time between an order hitting BATS’ firewall and the platform sending an acknowledgement of execution is 400 microseconds, making it faster than published figures from other MTFs.
Onward routing has started to emerge as a must-have tool for MTFs, with Turquoise, Chi-X and Nasdaq OMX Europe all announcing their intentions to launch such services. Hemsley says BATS also has plans for a range of onward routing order types planned and thinks the current high cost of access to exchanges will make this kind of service essential.
“The European market structure is very complex and using an exchange’s onward routing, even if going through a broker-dealer, can reduce costs for clients,” says Hemsley. “It will help to combat market inefficiencies.”
Having a platform that is feature-rich and caters for all market participants’ needs, regardless of size or type, is also an essential part of BATS’ European offering, says Hemsley. An announcement from NYSE Euronext on 8 September made it the third US exchange group to launch an MTF. However, NYSE Euronext’s MTF, also planned for a November launch, will not trade the stocks of its home markets of Belgium, Holland, France and Portugal, an approach that doesn’t quite add up for Hemsley.
“We think it makes much more sense to deal in all European stocks together; they are dabbling with the model rather than addressing it,” he says.