Buy-side anticipates Turquoise success

Pan-European trading platform Turquoise, which began its limited live trading period today, stands a good chance of being a success when it launches fully in early September, according to senior buy-side traders.
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Pan-European trading platform Turquoise, which began its limited live trading period today, stands a good chance of being a success when it launches fully in early September, according to senior buy-side traders.

Turquoise started trading ten stocks across the German and UK markets today. Of the five stocks in each market, three will be traded in the platform’s displayed, or ‘lit’, order book and two in its non-displayed, or ‘dark’, book. Over the next two weeks, Turquoise will introduce trading in an initial five stocks from each of its remaining 13 European markets. This process will culminate in full live trading of 1,267 stocks on 5 September.

All connected members will be able to use Turquoise’s full functionality in the initial limited live trading phase, and all activity will be “real, production trading”, according to a letter from Turquoise CEO Eli Lederman sent yesterday to the platform’s participants. The trades will include both brokers’ proprietary flow and client trades if the prices and order sizes on the platform meet clients’ best execution requirements.

Although, by Turquoise’s own admission, trading volumes will be low during its initial launch phase, expectations are high for when it launches fully.

With Turquoise’s nine shareholder banks – BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale and UBS – representing about a quarter of the trading on the London Stock Exchange (LSE), Adrian Fitzpatrick, head of investment dealing, Aegon Asset Management, believes Turquoise could potentially take this amount of business from the incumbent exchange. “That’s probably too high a number to begin with, but it’s something it could aspire to,” he said.

Brian Mitchell, head of dealing and portfolio control at Baring Asset Management, considers the launch of Turquoise to be “as significant as the launch of Chi-X”, a rival multilateral trading facility (MTF) launched in April last year. Referring to the claim that Chi-X had garnered a 20% share of trading on the UK’s FTSE 100 index during parts of the day’s trading on 13 August, Mitchell added, “If the larger brokers support it fully and pricing structures are competitive then there is little reason to doubt they'll take a comparable 20% from LSE shortly.”

Some see the actions of rivals – such as the LSE’s recent shift to a maker-taker pricing model, which both Chi-X and Turquoise also use, and the plans for its Baikal dark pool – as an indication of Turquoise’s potential impact. “The LSE is clearly concerned about the amount of business Turquoise will take from it,” said Tony Whalley, investment director at Scottish Widows Partnership (SWIP), who believes that the success of Turquoise rides on its backers. “A lot depends on the commitment from the nine key players in terms of the effort they put in and how they use the platform,” he said.

For transactions on its lit order book, Turquoise will charge 0.35 basis points (bps) for an aggressive trade, and will pay a rebate of 0.15 bps for a passive trade. It will charge 0.10 bps for both types of trades on auction, and 0.50 bps for both types of trades on its dark book.

Turquoise’s sell-side backers are also positive about the new platform’s future. “It is a very exciting development,” said Ashok Krishnan, managing director, execution services at Merrill Lynch. “For the first time we have got a bank-consortium-owned platform going live. The prospects I think are very good for Turquoise given the experience we have had with Chi-X.”

Some feel Turquoise is starting from a stronger position than Chi-X thanks to recent technological advancements. "When Chi-X started there were much fewer people capable of benefiting from the services and functionality these new trading platforms offer,” said Tim Wildenberg, head of direct execution services, Europe at UBS. "We are seeing some people who have not participated in Chi-X who are focusing on Turquoise, so I think there will be a set of players who have perhaps not been as aggressive in the Chi-X space coming into the game. The pool of people playing will be bigger."

Although the prospects for Turquoise look good at present, its future is far from assured. Its nine shareholders have committed to making markets in Turquoise stocks, and although this is expected to give the platform a boost, it will not guarantee that liquidity will stay with the platform. As Mitchell at Baring pointed out, “As ever, the stickiness of clients will be key.”

The buy-side in particular is unlikely to be loyal to any one execution venue. “We are not at all concerned whether our trade, or part of our trade, gets done on the incumbent exchange, on Chi-X, on Turquoise or wherever, as long as it is the best available price, size and execution,” said Martin Ekers, head of dealing at Northern Trust Global Investments.

Because of their best execution obligations, even Turquoise backers cannot guarantee they will trade on the platform. "The fact that we’re a shareholder isn’t going to affect how we trade on it, because we will offer best execution for our clients," said Wildenberg.

And despite being backed by some of the world’s biggest banks, Turquoise must not be complacent about its rivals. Although Lederman has asserted that his platform’s main rivals are the incumbent exchanges, Chi-X cannot be ignored. “Obviously the incumbents are where the majority of the liquidity resides today. Clearly there has got to be a level of attrition there,” says Krishnan. “But at the same time Turquoise has to bear in mind that Chi-X is already there and at a very competitive price.”

Krishnan believes the two MTFs should be able to co-exist. “We are very optimistic of the survival of both Chi-X and Turquoise. We see space for more than one MTF in the marketplace and we think it is a healthy statistic to have at least two or three venues apart from the incumbent market to have healthy competition both from an execution and clearing perspective.”

Before the end of the year, however, there will be five pan-European MTFs. Nasdaq OMX Europe, backed by the US-owned exchange group, goes live on 26 September. BATS Trading, which already operates successfully in the US, and Equiduct Trading, majority-owned by Börse Berlin, are scheduled to launch before the end of the year.

The five UK stocks trading from today on Turquoise are BP, Vodafone, Royal Dutch Shell, National Express Group and IMI. The latter two will trade in the dark book. The German stocks are Siemens, Allianz, Daimler, Salzgitter and ALTANA, with Salzgitter and ALTANA trading in the dark.

Five French and Dutch stocks will be added on 20 August; Swiss, Finnish and Swedish stocks on 21 August; and Austrian, Belgian Danish, Irish, Norwegian and Portuguese stocks on 22 August.