Exchange group NYSE Euronext has confirmed that it will launch a supplemental liquidity provider programme (SLP) in Europe from 1 April, as part of a series of initiatives to protect equity market share.
The operator of domestic exchanges in France, Belgium, the Netherlands and Portugal is also in discussions with regulators to unilaterally adjust tick sizes and launch a new service for retail brokers similar to the PartnerEx model used by Equiduct, the regulated market owned by Börse Berlin and market making firm Citadel.
The SLP programme, which NYSE Euronext hopes will boost the liquidity available on its order books, will initially cover French and Dutch stocks, as well as a handful of securities from the firm's other European markets.
To qualify as an SLP, NYSE Euronext members must adhere to a number of criteria designed to support liquidity quality. These include: maintaining a presence on both sides of the order book for a specific basket of stocks for at least 95% of continuous trading; offering prices based on a NYSE Euronext-derived best bid or offer for at least 10% of the time; and a minimum order size of €5,000.
According to trading technology provider Fidessa, NYSE Euronext's share of trading In French blue chips has declined from 47.31% in February 2010, to 37.74% in February 2011. Much of the volume lost by NYSE Euronext seems to have shifted off-exchange, accounting for 37.85% of CAC40 trading in February 2011, compared to 22.46% in the same month last year. Its share of Dutch AEX stocks has also slid, from 38.59% in February 2010, to 33.25% in February 2011.
Ticked off
Another strategy by NYSE Euronext to arrest its market share decline, which has been criticised by rival exchange operators, is its attempt to unilaterally narrow the tick sizes for French and Dutch blue chip stocks.
As well as potentially attracting greater flow from smart order routers, narrower tick sizes on NYSE Euronext compared to other markets would attract more high-frequency flow as an increase in the number of increments between two price levels allows trading participants to constantly amend or cancel orders at a lower cost.
However, smaller tick sizes can also damage market efficiency by making it harder for institutional traders to avoid market impact because of the increased level of ”noise' on the order book. Furthermore, high-frequency market participants can also jump the order queue easier, by increasing or decreasing the price of orders by one tick. Some institutional investors have cited such execution tactics as a reason for trading more volumes in dark pools.
NYSE Euronext initially announced the plan in late January, but postponed its implementation on 3 February to an unspecified date. A spokesperson from French regulator Autorité des Marchés Financiers confirmed that talks are still ongoing.
According to Charles-Albert Lehalle, head of quantitative research at agency broker CA Cheuvreux, the exchange's tick size plan raises questions about its commitment towards price formation on displayed, public venues.
“NYSE Euronext has been quite vocal about the need for a clear price formation process during MiFID discussions, particularly when it comes to the role of dark trading,” said Lehalle. “To come out with an independent announcement on tick sizes just a few days later was surprising.”
NYSE Euronext's move breaks a gentlemen's agreement between European trading venues dating from June 2009, which was implemented after an adjustment to tick sizes for UK and Italian stocks by multilateral trading facilities BATS Europe and Turquoise. The move provoked criticism from exchanges as a means for gaining short-term market share. Following the spat, trading venues agreed to harmonise tick sizes based on four tables devised by the Federation of European Securities Exchanges.
Most market participants agree that sector-wide collaboration is necessary to prevent diverging tick size regimes that could negatively impact overall market efficiency.
“The market needs an independent body to analyse the advantages and drawbacks of adjusting tick sizes and derive a policy that will be accepted and followed by all exchanges,” said Stephane Loiseau, head of cash equity execution at Société Générale.
In its recent MiFID consultation, the European Commission (EC) suggested giving power for setting tick sizes to the European Securities and Markets Authority. Cheuvreux's Lehalle supports the proposal.
“Tick sizes are an important part of market design and it is not in the market's interest for trading venues to adjust them for solely commercial reasons,” he said. “Every pragmatic market participant would agree that having regulatory constraints around tick sizes would be advantageous.”
Equiduct challenge
The third tactic from NYSE Euronext to win maker share from competing venues is the planned launch of a new negotiated order flow book, which targets retail brokers. The new service appears to be a response to the success of Equiduct in gaining French retail flow.
Since the turn of the year, Equiduct has seen turnover in French stocks rocket, with CAC40 trading reaching €1.19 billion in February 2011, compared to €400 million in December 2010. Retail trading across all of NYSE Euronext's markets is thought to account for 5-7% of overall trading volumes.
“One of the unique things about NYSE Euronext is that it has a decent proportion of retail flow,” said a senior trader at one bulge-bracket broker. “Without this, it will be harder to defend its platform against low-cost alternative venues.”
The new NYSE Euronext service is understood to bear similarities to the PartnerEx model used by Equiduct, but with some key differences.
Using PartnerEx, retail brokers forge bilateral relationships with market makers that have an obligation to trade at the consolidated best price calculated across multiple trading venues. After an agreement is made between the two parties, the PartnerEx order is then sent for immediate execution on Equiduct's order book and cleared using domestic central counterparties.
This allows retail brokers and their clients the ability to trade at the best price without having to invest in smart order routing technology or link to pan-European clearing houses.
Unlike PartnerEx, prices on NYSE Euronext's negotiated order flow book only reference the exchange group's own markets only, with executions taking place at or within the best bid and offer. In addition, orders will not be traded on the exchange’s order book, and will instead be executed on a non-displayed negotiated basis with immediate post-trade transparency.
Equiduct CEO Peter Randall claims NYSE Euronext has chased business from firms that operate high-frequency strategies to the detriment of retail investors.
“NYSE Euronext has engaged in a number of recent initiatives – such as price hikes and data centre migrations – that have ignored the French retail market in favour of high-frequency and statistical arbitrage firms,” said Randall. “The service level they generally provide to retail investors is reflected in the market share of Equiduct, and we have picked up significant flow in a number of retail names.”
According to Equiduct's figures, almost 70% of market orders of over €25,000 executed on its platform were traded at a better price than NYSE Euronext in January 2011, while this figure rose to around 85% for orders of €50,000.
NYSE Euronext declined to comment on the negotiated retail service or the proposed tick size changes, but confirmed that its SLP programme is due to launch on 1 April.