So long the only challenger to Europe’s stock exchanges, Chi-X will be joined by a new wave of multilateral trading facilities (MTFs) in the coming months. CEO Peter Randall asserts that the first-mover is still in good shape for the long haul.
For all its trailblazing success in proving that faster, cheaper execution could take market share from incumbent European stock exchanges, Chi-X remains a leader in a field of one. The foresight of agency broker Instinet, which launched the platform in April 2007 before opening up ownership to other financial institutions, has allowed Chi-X to establish a brand name and a track record. But Europe’s most prominent multilateral trading facility is also in a kind of limbo. How can its success truly be judged until brokers have a choice of MTFs to which they can route orders? The acid test comes in the autumn, when Turquoise, BATS (both of which have shareholders in common with Chi-X) and Nasdaq OMX are expected to join the fray.
For now, Peter Randall, Chi-X’s CEO, is content to keep faith with the strategy that has seen quarterly turnover on the platform increase to EUR132.5bn in the second quarter of 2008 from EUR1.54bn in Q2 2007. “Launching a market is a process not an event,” he says. “Market sentiment changes over time: twelve months ago, there wasn’t a credit crisis, for example, and the LSE’s shares were trading at around £15-16.” With an eye on the fact that the brokers that will be comparing platform performance are also shareholders of a number of MTFs, he adds, “But what I am pleased about is that we are getting ever closer to being able to tell our shareholders that we’re breaking even.”
Nor is Randall overly concerned that Chi-X’s rate of growth dipped in Q2 2008. The number of trades executed on the platform grew 90% over the last three months to 12.58 million, compared with a 176% upsurge in Q1 2008. Total share volume registered a 112% rise over the same period to 13.96 billion, having soared by 256% in Q1 2008. Randall puts this easing down to Q1 2008’s figures being inflated beyond the long-term growth trend by a post-MiFID connectivity rush. “The fourth quarter was worse than I’d have liked ideally, and Q1 2008 was much better,” he says. “But there are bound to be variations as growth continues. From a different perspective, Q2 2008 represents EUR132.5bn of business that other exchanges are not getting.”
The other pan-European MTF’s notwithstanding, competition in liquidity provision is now emerging from some unexpected sources. As well as Baikal, the London Stock Exchange-Lehman Brothers dark pool offering, Swedish brokers have launched Burgundy, a regional MTF aimed at keeping liquidity in Nordic stocks within its home market. Quite aside from the wisdom of naming liquidity pools after frozen Siberian lakes or French wines of declining popularity, any increase in the range of options will only serve to encourage market participants to weigh up the merits of all, says Randall. “If firms are trading on Burgundy, they are more likely to trade on Chi-X too,” he says.
However, Randall suggests that attempts to keep trading within regional centres might be a case of fighting back the tide, as gravity – and latency – increasingly favours platforms located closest to the major buyers. “It’s more important to be located closer to the customers than to be near the source of the produce,” he says. “Harrods does fairly good business as the cornershop for Knightsbridge even though there are plenty of cheaper places to buy milk.”
As the opposition looms ever closer, Randall is under no illusions as the size of the task of maintaining first-mover advantage. But there are signs that brokers expect Chi-X to be around for some time to come: a number are developing Chi-X-specific algorithms to take advantage of the order types introduced by the platform. How brokers use their smart order routing capabilities to connect venues will be critical to their success, says Randall. “Having multiple platforms is not the same as having multiple venues. Just as brokers have to work hard to get onto the approved lists of asset managers, trading platforms need to get on the smart order routers’ approved list – and stay there.”