LSE completes Turquoise deal, February start for new venture

The London Stock Exchange (LSE) has agreed to purchase investment bank-owned pan-European multilateral trading facility (MTF) Turquoise and create a new venture through the merger of Turquoise and the LSEs Baikal initiative.
By None

The London Stock Exchange (LSE) has agreed to purchase investment bank-owned pan-European multilateral trading facility (MTF) Turquoise and create a new venture through the merger of Turquoise and the LSE’s Baikal initiative.

The new entity will be 60% owned by the LSE and will continue to trade under the Turquoise name. The nine existing bank shareholders of Turquoise will retain a 40% stake in the joint venture and the LSE has said it will look to sell a further 9% of the issued share capital to other interested parties.

“We are very pleased to be joining forces with a number of our major clients in a partnership which we believe will offer an attractive range of innovative and competitively priced products and services across Europe,” said Xavier Rolet, the LSE’s chief executive officer and chairman-designate of the new venture.

The deal is subject to regulatory approval by the UK’s Office of Fair Trading and Financial Services Authority, and is expected to be completed by mid- to end-February. The management team to lead the new venture is likely to be unveiled at that stage, according to an LSE spokesman, who added that combination of the existing Baikal and Turquoise services and capabilities would also begin following regulatory approval.

Turquoise is currently built on technology provided by Cinnober, a Swedish trading technology provider, but this will be replaced “in due course” by systems from MillenniumIT, the Sri Lanka-based firm acquired by the LSE for US$30 million in September.

“Turquoise’s existing pan-European footprint is a strong proposition and together with the introduction of new trading technology and a neutral structure, we believe it is now well positioned to be an agent of change and to capture a healthy slice of the market’s growth potential,” said Rolet.

“Our partnership with London Stock Exchange Group is an important transaction for the next stage of Turquoise’s development,” added Eli Lederman, CEO, Turquoise. “With the support of London Stock Exchange Group we will be able to simplify our operational structure, attract a wider network and expand the platform’s product base.”

Baikal’s matching engine was due to go live before the end of this year but was postponed following the announcement of the LSE’s interest in buying Turquoise. The LSE’s intention is now to offer Baikal’s “innovative product pipeline” via Turquoise’s existing capabilities, including its dark trading service. Baikal, which, like Turquoise, is registered as an MTF, has offered a smart order routing service since the end of June. Customer testing of the Baikal Order Book began in September.

The spokesman emphasised the LSE’s strategy of aligning itself more closely with client goals and Turquoise’s pan-European lit trading venue as key drivers for the transaction. The deal is also expected to bring the exchange closer to its core members.

“The renewal of a partnership with the London Stock Exchange is a major step forward in the evolution of pan-European market structure. It is of fundamental importance that ventures such as Turquoise, which are critical for competition, are allowed to survive and flourish,” said Phil Hylander, head of principal strategic investments at Goldman Sachs, one of the existing Turquoise shareholders. “The injection of technology, brand, and experience that Turquoise will get from the London Stock Exchange, increases the likelihood of real, lasting competition in a marketplace characterised by established local players. In addition, it provides a platform for innovation outside of the traditional cash equity markets.”

According to figures from data vendor Thomson Reuters, Turquoise traded €23.4 billion in November, representing 3.5% of pan-European equity trading market share. The LSE will fund the new venture for the first 24 months after completion of the deal with the intention of bringing the business to sustainable profitability. As a result, it intends to incur exceptional costs of up to £20 million in the current financial year, from technology, restructuring and integration costs. For the year ending 31 December 2008, Turquoise’s losses before tax were £15.7 million with gross assets of £11 million.

Turquoise was launched in September 2008, close to two years after founding members Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, BofA Merrill Lynch, Morgan Stanley and UBS announced their intention to establish a rival trading platform to the London Stock Exchange, partly in protest at the exchange’s reluctance to reduce transaction charges. The founding banks, plus additional shareholders BNP Paribas and Societe Generale undertook market-making agreements from launch which guaranteed liquidity to the pan-European trading platform, but Turquoise’s market share fell sharply when those agreements lapsed in March.

Turquoise went live with a mid-point order book on 14 April 2009, which allowed users to submit dark orders that are smaller than MiFID’s large-in-scale requirements. In July, the MTF launched TQ Lens, a dark liquidity order routing and aggregation service and started to offer trading in depository receipts in October. In August, it was announced that Turquoise had employed UBS to help it find an owner and the LSE confirmed it was in exclusive talks in October.

Baikal, originally a joint venture between the London Stock Exchange and Lehman Brothers, was planned to be a non-displayed MTF and liquidity aggregation service, but so far only its smart order routing capability, introduced in June, has gone live.