Ex-Chi-X Europe CEO Alasdair Haynes will go head-to-head with his old firm with a new trading venue that aims to break a perceived duopoly in European cash equity trading.
Aquis Exchange, which has initial funding from private backers, will seek approval from the UK’s Financial Services Authority to launch as a multilateral trading facility (MTF) in Q2 2013.
Haynes claims the venue, which currently has seven staff members – four of which worked on the technology team at Chi-X Europe – will offer a new and innovative pricing structure that slashes in half the current fees charged for execution.
The majority of MTFs use a maker-taker pricing model that rewards members who add liquidity. However, the practice could be outlawed in Europe after the European Parliament’s Economic and Monetary Affairs Committee voted last month for an amendment to MiFID II that prohibits investment firms from receiving any benefit from routing orders to a particular trading venue.
Aquis also plans to introduce new order types and offer an interoperable clearing solution.
“The price and speed benefits that MTFs sought to provide have largely been had,” Haynes told theTRADEnews.com “There is now a need for the next wave of innovation in European equity trading.”
He added that trading in most major European indices is now dominated by a combination of a country’s domestic exchange and recently merged MTF BATS Chi-X Europe. According to Thomson Reuters data for September, BATS Chi-X Europe and the relevant domestic bourse accounted for 82.2% of FTSE 100 trading, 90.1% of DAX trading and 86.9% of CAC 40 trading.
On a pan-European basis, BATS Chi-X Europe suffered its fourth monthly market share decline in September, grabbing 19.5% of the region’s cash equity trading compared to 20.1% in August and 21.6% in May. Last month, total trading on CXE, the new name for the former Chi-X Europe order book, reached 15.8% – its lowest total since June 2011.
Grabbing new liquidity
“There is a need for at least three viable trading venues for equities in Europe,” said Haynes. “We’re building our platform with the low-volume environment in mind and our technology is being designed in a way that allows us to be cost efficient. We feel there is an opportunity to target OTC volumes that are likely to move on-exchange as a result of MiFID II.”
MiFID II is planned for adoption around 2014/5 following its passage through the European Parliament and the Council of the European Union. A large part of negotiations among policy makers so far has focused on the potential elimination of broker crossing networks by forcing them to reclassify into MTFs or systematic internalisers (SIs).
ECON’s amended version of MiFID II – which will be voted on by all MEPs later this month –included a provision to minimise OTC equity trading by trading as much of it through SIs as possible.
A number of start-up trading venues have been launched in the past two years but most have struggled to gain traction among market participants. Chi-X Europe introduced a ‘jump ball’ scheme shortly after launch that rewarded those traded above a certain value with an equity stake in the MTF. Chi-X Europe and BATS Europe also gained the backing of key electronic market making firms. Turquoise, built up its volumes through liquidity agreements with its nine founding investment banks before it was eventually acquired by the London Stock Exchange Group in February 2010.
Haynes admits that one potential barrier to entry could be ensuring Aquis is prioritised on broker’s connectivity lists, but he asserted that the platform “won’t live or die based on HFT flow alone”.
“We will use the initial investment from our private backers to launch Aquis then decide at a later date whether we the best route for further funding is strategic or mutual investment,” said Haynes, adding that a high level of customer service would also be among Aquis’ main selling points.