Four firms are expected to buy stakes in Chi-X Global in Q2 2011, following the implementation of a series of cost-cutting measures by the market operator and exchange technology provider, according to sources familiar with the matter.
Instinet, the agency broker that owns Chi-X Global, which in turn owns alternative trading systems Chi-X Canada, Chi-X Japan and Chi-X Australia, trading technology supplier Chi-Tech and a half share of a Asian regional dark pool Chi-East, is expected to retain a majority stake following this round of investment. At least six firms have been approached since the broker began talking to potential investors, and further rounds are likely once the initial stakeholders are confirmed, which could lead to Instinet further loosening its control over the company.
Chi-X Global's operational costs, estimated by sources to be around US$50 million per annum in 2010, were seen as a sticking point with potential investor, as well as the source of concern both at Instinet and parent firm Nomura Holdings. As part of the cost-cutting measures, CEO John Lowrey was replaced by Tal Cohen, then the firm's head of Americas, on 7 September and Ron Gould, CEO of Asia Pacific, also left the firm shortly afterwards.
The cost reductions have brought the burn rate of the firm to an investible level and Chi-X Global's businesses in Canada and Japan have maintained investor interest. The investors are likely to include investment banks and electronic market makers, the same type of firms to which Instinet sold stakes in Chi-X Europe, the multilateral trading facility which is in the process of being taken over by trading venue operator BATS Trading, a deal expected to close in Q2 2011 following regulatory approval.
Chi-X Canada, which launched in 2009, has achieved profitability and holds a market share for trading Canadian equities of around 11% by volume.
Chi-X Japan, which went live in July 2010, traded ¥282 billion (US$3.4 billion) worth of Japanese equities in February 2011, 33% higher than January's total of ¥212 billion (US$2.58 billion). The platform, which now has a total of 14 members, also set a new one day turnover record on 23 February of ¥24.1 billion (US$294 million). In January, Chi-X Japan had a total market share of 0.83% of Japanese equities trading by volume, according to data provider Thomson Reuters' Equity Market Share Reporter, making it the second-largest proprietary trading system in Japan.
“As has been the case in other markets in which Chi-X operates, we are encouraging new trading participants to enter the market, which in turn generates more liquidity and benefits all investors,” said Cohen in early February.
Chi-East, the pan-Asian trading venue launched in November 2010 as a joint venture with the Singapore Exchange has yet to release trading figures, and Chi-X Australia is expected to launch later in 2011, having weathered a series of regulatory delays.