Interoperable MTFs primed for market share growth

The introduction of clearing interoperability on BATS Chi-X Europe last Friday could see multilateral trading facilities (MTFs) increase their market share over domestic bourses, as brokers seek to further reduce trading costs.

The introduction of clearing interoperability on BATS Chi-X Europe last Friday could see multilateral trading facilities (MTFs) increase their market share over domestic bourses, as brokers seek to further reduce trading costs.

On 6 January, Chi-X Europe and BATS Europe, which completed a merger on 30 November, launched full four-way interoperability schemes that allow members to nominate central counterparties (CCPs) independently for the first time.

In addition to the MTFs’ incumbent clearer EMCF, trading members can opt to clear trades through Anglo-French CCP LCH.Clearnet, SIX x-clear and EuroCCP, the European arm of US clearer DTCC. Members will no longer be required to maintain a relationship with EMCF for markets where they have chosen an alternative CCP. The scheme permits trading members to choose different CCPs for different geographic markets.

While very similar, the two interoperability schemes will currently run concurrently as BATS Europe’s order book and the former Chi-X Europe order book run on separate technology platforms. When Chi-X Europe moves over to BATS technology, scheduled for completion by 30 April, the MTFs will offer exactly the same service.

In addition to BATS Chi-X Europe, Turquoise, the London Stock Exchange-owned (LSE) MTF, launched the first phase of its interoperability scheme in November last year, meaning it is now possible to use a single clear across the three largest alternative trading venues in Europe.

Exchange pressure 

According to Andrew Bowley, head of electronic trading product management, Nomura, the MTF initiatives could compel domestic bourses to follow suit, or risk losing more market share.

“We were keen to be early to take advantage of full interoperability schemes, not just because of the potential for a significant reduction in trading costs but also because we wanted to demonstrate our desire that other exchanges follow suit,” Bowley told “Now the three biggest MTFs have interoperability in place, the smart routing costs associated with those venues will lower, which favours these venues.”

Post-trade costs can be incorporated into Nomura’s smart order routing logic for both client and proprietary flow.

Citing the CCP’s range of markets, Bowley says Nomura uses EuroCCP to clear its trading across BATS Chi-X Europe and Turquoise as well as NYSE Arca Europe and SmartPool the respective lit and dark MTFs run by NYSE Euronext.

“Our choice of CCP was driven by the commercial proposition including the fact that EuroCCP represents the best ‘horizontal’ structure and has the largest coverage of all the clearers involved in interoperability schemes, meaning we can trade five pan European MTFs with single settlement and offsetting margin,” said Bowley.

In addition to market coverage, Tomas Kindler, head of clearing relations at SIX Securities Services, said brokers would be swayed by factors such as costs – including clearing and settlement fees and collateral costs – long-term financial viability and sophistication of risk management technology. Kindler said that SIX x-clear had seen a threefold increase in the amount of trades it executed on BATS Europe on Friday.

CCP consolidation 

Kindler predicted that competition between clearing houses would lead to a reduction in the number of European clearing houses sooner rather than later. The LSE is already engaged in exclusive discussions to takeover LCH.Clearnet, although no date for the conclusion of talks has been revealed.

Up to 60% of Europe’s trading flows expected to be fully interoperable before the end of the year. In addition to existing arrangements at the LSE and SIX Swiss Exchange, which have offered the choice of SIX x-clear and LCH.Clearnet since 2008 and Turquoise, Nasdaq OMX Nordic – which runs domestic Swedish, Danish and Finnish markets – and Scandinavian MTF Burgundy will follow suit with their own full interoperability programmes in the spring.

SIX Swiss Exchange, which shares a parent with SIX x-clear, is also engaged in discussions to add EMCF and EuroCCP to its post-trade options.

BATS Europe was the first MTF to offer clearing interoperability and the first trading venue in Europe to offer more than two clearers. However, under BATS’ initial scheme that was implemented at the end of July, trading participants on both sides of the trade were required to select a preferred interoperating clearer from EuroCCP, SIX x-clear and LCH.Clearnet. If one or both counterparties did not choose to use the service, the trade was sent for clearing to EMCF. According to the MTF, 25% of the flow from some of those brokers that opted to use the existing interoperability service are trading using their preferred CCP. No technical change is required by members to swap from the preferred interoperability scheme to the full service.

The bourses that do not offer clearing choice, which include Deutsche Börse, NYSE Euronext, Bolsas y Mercados Espanoles and Borsa Italiana, could be compelled under MiFIR, a regulation that will accompany the next iteration of MiFID, to open up their clearing infrastructure to competitors. While many regard this as one of the more positive moves reforms in MiFID II, such provisions are unlikely to be effected until 2014 at the earliest.