Multilateral trading facilities Chi-X and Turquoise are not yet in a position to replace primary exchanges despite their growing market share, but are proving useful sources of liquidity to buy-side traders at certain points in the trading day, according to new research from Credit Suisse Advanced Execution Services (AES).
“Given that the primary exchange tends to be highly skewed towards open and close, with less liquidity intraday, this means that intraday liquidity may sometimes be easier to find on MTFs,” the study said.
Credit Suisse’s portfolio strategy analysts studied intraday turnover in five-minute intervals on Chi-X, Turquoise and the relevant primary exchanges in 50 pan-European stocks most traded by the MTFs. The list included stocks traded on Euronext, OMX Nordic Exchange, London Stock Exchange, SWX and Deutsche Börse’s Xetra platform.
The study was conducted between 15 August and 18 September. Chi-X was already fully operational during the period, but Turquoise was in its roll-out phase for part of it. The MTF began trading on a limited basis on the first day of the study period, and started offering its full complement of stocks on 29 August.
Credit Suisse found that Chi-X achieved its best volumes
between 08.00 and 09.00, and after 14.30 when the New York markets open. Similarly, for Turquoise, the best periods were fund to be between 08.00 and 09.00, and from 14.30 to 15.30.
The study added that Turquoise exhibited relatively more liquidity in the morning, while Chi-X had more after New York opens. Credit Suisse attributed this to the market-making agreements Turquoise has with its nine founding banks. “This increases the liquidity in the morning just after the auction period,” the study said. “Interestingly, this market-making tends to provide liquidity to illiquid names such as Schroders, Unibail-Rodamco or Essilor.”
Primary exchanges, on the other hand, though benefiting from a boost at 14.30 when New York opens, exhibited large peaks at the open and close. According to Credit Suisse, this is consistent with the fact that exchanges offer opening and closing auctions, while of the MTFs only Turquoise has an opening auction.
The study also found that bid/ask spreads on primary exchanges are still slightly narrower. Primary exchanges’ average bid/ask spreads between 15 September and 18 August were 12.20 bps, compared with 13.29 bps on Chi-X and 21.74 bps on Turquoise. Credit Suisse attributed the wider Turquoise spreads to the relative lack of liquidity on Turquoise at the time of the study.
The bank added that while Chi-X’s spreads were similar to the primary exchanges’, they are more volatile, except in the first hour of trading. “At this time of the day, there seems to be more spread uncertainty trading on primary than on Chi-X,” the study said. “For the rest of the day, primary exchanges appear less risky.”
Credit Suisse said Chi-X has boosted its share for the 50 stocks in the study to 18% over the last 18 months, and Turquoise has increased its share to 2%. According to Thomson Reuters’ latest market share report, Chi-X accounted for 5.31% of the value and 5.56% of the volume traded in Europe overall in September, up from 5% and 5.22% in August. Turquoise achieved 0.93% of both the value and volume in September, up from 0.02% and 0.03% in August.