MTFs see light at the end of the tunnel

The business model for multilateral trading facilities appears to be paying off, with both BATS and Turquoise expecting to join Chi-X Europe in turning a profit within 18 months.
By None

The business model for multilateral trading facilities (MTF) appears to be paying off, with both BATS and Turquoise expecting to join Chi-X

Europe in turning a profit within 18 months.

Profitability has long eluded many MTFs. Liquidity has proven more difficult to attract than some hoped, hindered by lower trading volumes following the financial crisis. European trading volumes as measured by turnover stood at €1.4 trillion in January 2008, €561 billion in January 2009 and €682 billion in January 2010.

This has already hit several businesses. Turquoise's original owners, a consortium of nine investment banks, sold a majority stake to the London Stock Exchange Group on 18 February 2010. Nasdaq OMX Europe, the MTF operated by exchange group Nasdaq OMX, shut down on 1 July 2010 following an assessment of the platform's business prospects. The launch of London Stock Exchange's (LSE) own dark MTF project had been delayed following its partner Lehman Brothers' collapse in 2008 and was only fully revived with the acquisition of Turquoise's infrastructure.

As the backing of stock exchange groups and investment banks has not proven enough of a backstop to ensure survival, sceptics have challenged the sustainability of the MTF model.

Among this gloom only Chi-X Europe, the first MTF to launch in March 2007, has seen any profit and CEO Alasdair Haynes believes that the firm is now set on the right track, “We have turned a profit for every month so far this year. As we move into the second half of 2010, our business model is now both proven and sustainable, and we are now looking to expand our European business as new opportunities arise.”

As trading volumes improve, Chi-X's closest MTF competitors are staking their own claims to future profits. BATS Trading posted a $10 million loss in 2009, which it attributed to discounts given to trading firms in order to attract liquidity, and expects to post a $5 million loss in 2010. But this is about to change says Randy Williams, vice president of global communications at BATS. “We need around €4 billion worth of turnover in Europe per day to be consistently profitable. We have hit this target on some days but just not over a whole month yet. Assuming volume levels improve, we expect to be profitable by the end of Q1 2011.”

Williams adds that if volumes do not grow, support for the European business is in no doubt, “As a group, we have been profitable for about 30 months and have no debt, so there is no shortage of additional funding for the European platform should it be required.” The firm thrives on a low cost base, with its US options platform needing only 1.8% market share to break even. It is currently on 0.6%.

The LSE is also seeing light at the end of the tunnel for Turquoise, “Our aim is to make Turquoise profitable within 24 months and we are just under half way there,” said a spokesman for the LSE.

Although cautious to point out that growth may not continue in a linear fashion, the MTF has a host of products and initiatives in the pipes to secure further flow he explained. “We are growing both the pan-European lit and dark books, and introducing new products such as the US, Czech and Hungarian stocks.

We hope more members will connect to the platform once the transition to the Millennium Exchange is completed in October and clients will benefit from synergies from the close similarity of the Turquoise interfaces to the London Stock Exchange system in the same central London data centre.”

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