Turquoise, a pan-European multilateral trading facility backed by nine of the largest investment banks, faces a battle to maintain its market share in European equity trading from this week as its market-making agreements expire.
The nine founders, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Générale and UBS, were committed to making markets for six months from Turquoise’s launch and the platform has built up a market share of around 6% share of pan-European trading, according to figures from trading systems vendor Fidessa’s Fragmentation Index.
The unprecedented volatility experienced in the cash equity markets in the last quarter of 2008 meant that the market making agreements, which end this Friday, have had to be adapted to circumstances.
“The agreement has been adjusted during its lifetime to take into account the severe intra-day and general volatility, which makes market making an extremely difficult pastime when spreads are moving so fast,” said Ian Werner, head of compliance, legal and regulatory affairs, Turquoise.
As the agreements come to an end, Turquoise’s backers could be reluctant to provide guaranteed levels of liquidity, given continued price volatility and reduced trading volumes.
“They will almost certainly see a drop in liquidity,” said one senior buy-side trader. “All of the involved brokers I have spoken to have said the market making operations have cost them money. The whole idea of committing to making markets is extremely difficult.”
Turquoise has recently announced a range of measures to keep hold of the liquidity it has already amassed.
These include changes to its pricing tariff and technology upgrades to its trading platform. The MTF’s enhanced rebate fee schedule offers a 0.22 basis point rebate to firms who execute more than 3% of volume in particular country market segment; firms that trade 2% receive a 0.20 bps rebate.
“We considered recognising a market maker member category under our rules, but after consulting our members and the regulator we decided to extend the ability to obtain a rebate on the basis of the provision of liquidity to the platform to all of our members,” said Werner.
In addition, Turquoise also announced upgrade to improve its maximum achievable throughput by 150% and reduce end-to-end response time latency to below one millisecond, down from its current average of between 1.8 and 2 milliseconds. The upgrade was scheduled for completion last Friday.
If Turquoise can continue to compete on best price and latency, the end of market making agreements should not be an issue, says Bill Capuzzi, president, G-Trade, the electronic execution arm of BNY ConvergEx. “We see Turquoise as a relevant part of our trading strategy and I think they will still be a viable player in the future.”
Whether Turquoise’s founders continue the same level of participation on the platform remains to be seen, although most would agree this remains in the banks’ best interests.
“If there is liquidity in the market, it pays to be involved in market making,” said Steve Grob, director of strategy, Fidessa. “The issue is what happens in the small print – people don’t want to be stuck in periods of high volatility in positions they can’t get out of and low volumes.”
“All things being equal, the investment banks who have money invested in Turquoise would rather execute their business there than anywhere else because they have a major investment in it,” added the buy-side head.