If any of Europe’s exchange heads believe their trading fees are now trimmed to the bone, they had better think again, according to Alasdair Haynes, the new chief executive of Chi-X Europe.
Haynes, who took the reins of the pan-European multilateral trading facility from interim chief Mark Howarth at the beginning of this year, also asserts that exchanges should not pin their hopes on MTFs running out of steam.
“From what I hear, the business model of many exchanges is to wait for the MTFs to die, because they think they are not sustainable,” Haynes told theTRADEnews.com. “If that is the case, that is fantastic news for us because that is completely and utterly incorrect.”
He added, “Our prices are not going to go up, and our business model is fully sustainable going forward. I believe that other people’s trading costs are going to have to fall and we are going to continue to increase market share. At this point, we are five to seven times cheaper than the incumbent exchanges.”
Much has been made of MTFs’ inability to turn a profit to date, with many participants branding the platforms’ maker-taker pricing, which typically affords them a tiny 0.1 basis point margin per trade, unsustainable. Critics add that the business model must be flawed if even Chi-X, Europe’s second largest trading venue by volume in January 2010, according to figures from the Federation of European Securities Exchanges (FESE), cannot break even.
Chi-X Europe executed 17.4 million trades in January, according to FESE’s figures, compared with 20.6 million for the LSE Group (including Borsa Italiana and Turquoise) and 13.2 million for NYSE Euronext.
Haynes points out that Chi-X Europe has already been profitable over certain periods, but argues that the focus on the MTF’s bottom line misses the point. “It is not about profitability, it is about value creation,” he said. “Most growth businesses could become very profitable very quickly by, for example, stopping investment. But our job is to build on the solid business that has been created here.”
While reporting a profit now might send a strong signal about Chi-X’s longevity, Haynes says a combination of ‘jump-ball’ schemes – which offer high-volume members the chance to buy a stake in the company – its 19 investors and its trading revenue are more than sufficient to keep the firm running.
“We are a very well-capitalised business. Given the levels we are trading now, we could be going here for many, many years, even if we didn’t grow,” he insisted.
Exchanges have cut their trading fees. The new London Stock Exchange tariff, for example, introduced in February, charges as little as 0.2 bps for an execution. Deutsche Börse’s lowest fee for trading DAX instruments on Xetra is 0.360 bps, applicable to high-volume members either submitting non-persistent orders or using the exchange’s Enhanced Transaction Solution interface.
But Haynes asserts that incumbent exchanges’ tiered fee structures, which award the lowest prices to the highest volume traders, have only benefited exchanges’ biggest clients. MTFs typically charge the same rate regardless of volume.
“The headline rate looks good, but the smaller and the mid-sized players haven’t really benefited from any cut in fees,” he said. “That plays into our hands because we have a very simple maker-taker fee structure. It has not changed since we started business and it is not going to change any time in the near future.”
Just as he believes exchanges need to lower their rates further, Haynes thinks the total cost of trading in Europe needs to be cut. “Although the US and the European Economic Area are roughly the same size economically, the US equities market trades six to eight times more because the frictional costs here are significantly higher,” he said.