Shared ownership structure to take Turquoise to next level

The new ownership structure of pan-European multilateral trading facility Turquoise following its takeover by the London Stock Exchange (LSE) will be key to stepping up competition with market-leading MTF Chi-X Europe, according to those involved with the deal.
By None

The new ownership structure of pan-European multilateral trading facility Turquoise following its takeover by the London Stock Exchange (LSE) will be key to stepping up competition with market-leading MTF Chi-X Europe, according to those involved with the deal.

The LSE announced the acquisition of Turquoise on 21 December, in a transaction that allowed the MTF’s nine member banks to retain a 40% stake in a new entity that also includes the LSE’s Baikal MTF. The LSE will have a majority 60% stake at first, but has earmarked a further 9% of the new platform’s issued share capital for other potential partners.

The acquisition of Turquoise will give the LSE both lit and dark pan-European trading capabilities. The exchange has said it will integrate Turquoise with Baikal, the LSE’s nascent dark pool. Baikal’s smart order routing function, provided by Fidessa, is the only live element of the platform thus far, leaving room for synergy with TQ Lens, Turquoise’s dark liquidity aggregation service, which went live in July with seven bank partners.

According to an LSE spokesperson, majority exchange ownership of the new venture will make it easier to drive the MTF’s future growth, by allowing the exchange to concentrate on infrastructure and running the platform, while letting the banks have a say in ensuring Turquoise meets the needs of its biggest customers.

“The neutrality and independence an exchange-run platform can bring is an important selling point, which is why we were keen to have a majority stake,” the spokesperson told “The initial plan for Baikal was to encourage other participants to take a stake, and the large banks involved with Turquoise were the same type of clients we were targeting.”

Baikal was originally a joint venture between the LSE and the now defunct investment bank Lehman Brothers. Nomura, which bought Lehman’s European and Asian operations, and Barclays Capital, which purchased Lehman’s North American business, are among the larger brokers that do not currently have a stake in Turquoise.

Jack Vensel, managing director, EMEA electronic execution, Citi, who is on the board of Turquoise and part of the sub-committee of member banks that negotiated the deal with the LSE, says efforts to balance the individual interests of Turquoise’s member firms may have been a hindrance to the platform’s further development.

“Running the MTF as a consortium was very difficult in terms of looking for agreed areas of further growth,” said Vensel. “However, a number of the firms involved were adamant about staying involved at the board level in running an MTF and being part of the market structure debate going forward. As investors, we have now gained a strong technology platform and the opportunity to participate in Turquoise without further funding responsibilities for 24 months.”

The LSE has committed to investing up to £20 million over the next two years in the new venture, which it says will relate to technology, restructuring and integration costs. For the year ending 31 December 2008, Turquoise’s losses before tax were £15.7 million. The new Turquoise will eventually migrate to a new technology platform supplied by Millennium IT, the Sri Lanka-based technology firm the LSE bought for $30 million in September.

Turquoise and other alternative trading venues, such as Chi-X Europe, BATS Europe and Nasdaq OMX Europe, have already succeeded in providing significant competition to the region’s exchanges. According to figures from Fidessa’s Fragmentation Index, a weekly analysis of liquidity fragmentation across Europe, MTFs accounted for 20.55% of European trading in the last trading week of 2009. Andrew Bowley, head of electronic trading product management at Nomura, believes the deal struck between the LSE and Turquoise’s member banks will shake up the pan-European landscape further.

“While trading costs have reduced, there’s still a need to continue to establish strong pan-European platforms that, with Chi-X, will compete effectively with other venues such as NYSE Euronext and Deutsche Börse,” said Bowley. “The banks would rather trade German stocks on Turquoise if available at a lower cost than on Deutsche Börse, for example.”

Chi-X Europe is currently the largest pan-European trading venue. According to figures from data vendor Thomson Reuters, it traded just over €75.4 billion in December 2009, giving it a pan-European market share of 13.72%. By comparison, Turquoise traded €16.4 billion in December, representing 3% of pan-European equity trading.

Bowley also highlighted that the deal is a further sign of LSE CEO Xavier Rolet’s intent to rebuild relationships between the exchange and its main members since he took the reins from Clara Furse in May last year.

“Without a doubt, Rolet has made a tremendous change at the LSE in terms of rebuilding relationships with banks and brokers,” said Bowley. “The Turquoise deal strikes a good balance where the LSE has control, but the shareholders still have a significant strategic interest.”

Turquoise was launched in September 2008, almost 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 LSE, partly in protest at the exchange’s reluctance to reduce transaction charges.