Multilateral trading facility BATS Europe’s retention in October of the FTSE 100 market share it won with its September price promotion may indicate that inverting fees can generate liquidity on a sustained basis, but it also suggests the continued growth of high-frequency trading in London.
According to its own figures, BATS Europe’s market share of trading in the UK’s FTSE 100 large-cap index for October was 8.05%, up from 7.21% in September and 4.11% in August. The firm’s ‘inverted’ price promotion, which rebated liquidity posters 0.40 basis points and charged liquidity takers 0.20 bps, ended on 30 September.
BATS has a history of growing market share in the US with inverted pricing, but critics have argued that such promotions only temporarily generate increased liquidity from high-frequency market makers, which then disappears once the promotion ends. However, some market participants point out that price promotions can have a more long-term effect if they are successful in attracting both traditional and market making flow.
“Credit Suisse does not route down to BATS or any other venue on our clients’ behalf just because their fees are more attractive this month than last month. However, if you change the pricing and attract more market makers onto your platform, they are likely to turn on more flow and make keener prices, which means that the smart order routing flow should follow,” George Andreadis, head of AES liquidity strategy, Europe at Credit Suisse, told theTRADEnews.com. “It makes sense for the liquidity providers to continue trading on the platform even after the execution cost reverts if their models still work on the increased liquidity that is attracted to the platform.”
Price promotions can also push previously undecided firms to connect to a particular venue, according to Steve Grob, director of strategy at trading technology firm Fidessa. “Once connected, they are likely to trade on the venue even when the price promotion is removed,” he said.
A promotion can also result in lasting liquidity if it helps a venue achieve critical mass. “Once a venue reaches a certain volume threshold, more and more brokers feel they need to include it in their best execution policies,” said Grob.
However, pricing promotions are only part of the picture, according to Randy Williams, vice president of US sales and global communications at BATS Global Markets, BATS Europe’s parent firm. “We find pricing promotions can be very effective, but they aren’t going to work unless your technology performs well, your platform is consistent and you listen to what your customers have to say,” he said.
BATS Europe’s recent prowess in FTSE 100 stocks may also indicate that high-frequency traders are taking an increasing interest in liquid UK stocks, prompting a shift in trading from the more expensive London Stock Exchange to the cheaper MTFs. Estimates of high-frequency trading in London vary between 40-50% of total equity volumes.
While the LSE’s market share of displayed order book trading in FTSE 100 stocks trading slid to 58.1% in October from 64.2% in August, according to figures from data vendor Thomson Reuters, Chi-X Europe’s grew to 20.3% from 19.4% and Nasdaq OMX Europe’s increased to 1.8% from 1.2%. The only exception was Turquoise, whose FTSE 100 market share fell to 5.6% from 7.6% over the same period. Thomson Reuters, which bases its figures on a slightly different data set to BATS, reports that the venue traded 7.6% of the FTSE 100 in October, up from 4.1% in August.
“We may be starting to see an increase of high-frequency trading activity in Europe which is focusing more on the MTFs and more in London because to them that is the most familiar market after the US,” said Brian Schwieger, director of EMEA execution services, Bank of America Merrill Lynch. “The high-frequency players have been extending their models and volumes are picking up again. This is the sort of environment where you start to see them become more active.”
Several high-frequency firms that traded on BATS in the US followed the company to Europe in the hope of replicating their strategies in a new market. Williams says UK stocks are popular with high-frequency traders because of existing high liquidity levels. “Over time we think you will see the same growth in the MTFs in the other European indices as well,” he said.
But while price promotions and other fee structure changes are likely to continue as MTFs battle for market share, price is not the only competitive differentiator. “While there are differences at the margins between MTFs’ pricing, that is not what the customer base is talking to us about,” says Mark Howarth, CEO of Chi-X Europe. “The conversation is around innovation, liquidity provision and service.”