Tony Mackay, founding CEO of Chi-X Europe, plans to launch a new global exchange before the end of the year that will use social networking principles to let the buy- and sell-side trade larger blocks of stock by choosing both their preferred counterparties and terms of trade.
Designed to tackle liquidity fragmentation and diminishing order sizes, the new platform will be rolled out in Europe, the USA and Asia. Starting with equities, the ‘worldwide bourse’ will add other asset classes over time.
“We have developed a market that will apply social networking principles to trading,” said Mackay, who previously served as CEO of agency broker Instinet in Asia and Europe. “Both buy- and sell-side institutions will regain the ability that they had before computerised trading, to prioritise their flow only to trusted counterparties.”
Mackay notes that in challenging exchange monopolies alternative trading venues have also created new problems for the buy-side. As trading venues competed for volumes, they focused on speed and small trade size at the expense of platform functionality to help block trading. Meanwhile, broker crossing networks are valued by clients, but most don’t interact with each other as brokers seek to protect their liquidity from rivals. “We’ve ended up with lots of islands of liquidity but have extremely limited means of reaching one from another. What we’re trying to develop is a circle of friends approach that allows you to choose your counterparts and parameters, then adapt your trading behaviour according to the results,” said Mackay.
Launched by agency broker Instinet in 2007, Chi-X Europe became the largest single equity trading platform in Europe in August 2011 by value traded. The UK Competition Commission cleared its sale to BATS Global Markets in November 2011. The combined BATS Chi-X Europe platform captured 24.3% of European share trading in March 2012.
According to Mackay, his new platform will have three kinds of market: a call auction periodic crossing market; a continuous market; and a request for quote (RFQ) market. In each, users can list which firms to interact with on a disclosed basis – i.e., if an institution wishes to trade 100 orders, it can disclose 80 of those orders to a trusted sub-set of buy-side firms, 10 more to hedge funds, and another 10 to selected sell- side firms, for example. In the RFQ market, users will also be able to choose which specific traditional and independent market markers they wish to engage. The intention is to offer free and open access for broker-dealers as well as buy-side firms, and to enable market participants to cross inside the spread with trading fees rewarding bigger blocks.
“We need to call off the ‘dumb technology’ arms race,” said Mackay. “Large buy-side firms and brokers are spending a lot of money on internal matching engines, dark pools and crossing networks. But it’s all based on dumb matching technology. Our smarter model will introduce choice, removing the need for all that expenditure of resources.”
Built by developers with a strong track record in matching engine design, the platform’s functionality will likely evolve based on ongoing consultations with broker-dealers, asset managers, exchange partners and technology vendors, acknowledged Mackay.
The schedule for rolling out the new platform is subject to regulatory approvals.