MTFs versus Incumbent Exchanges, Round One

There were two more great discussions during TradeTech that compared and contrasted the incumbents with the new MTFs. The first focused upon attracting liquidity and what that means; the second on the likely view for the future of trading venues.

The first discussion was a debate amongst a panel comprising:

• Hirander Misra, COO, Chi-X Europe;
• John Wilson, Chief Executive, Baikal;
• Rainer Riess, Managing Director, Cash Market Business Development, Deutsche Boerse;
• Mark Hemsley, CEO, BATS Trading Europe; and
• Simon Brickles, CEO, Plus Markets Group;

chaired by Andrew Silverman, Managing Director Electronic Trading, Morgan Stanley.

There was a little of the usual spikey stuff about “our exchange is better / cheaper / faster than your one” especially when Hirander of Chi-x mentioned how their order execution was 1.6 basis points better than Xetra’s, to which Rainer of Deutsche Bourse responded that: “Chi-x can claim a 1.6 bps improvement over Xetra but Xetra could claim a 10 bps improvement over Chi-x dependent upon how you measure it.”

Herr Riess was quite fired up in fact and continued: “you must not confuse reality with marketing. It reminds me of the bargain airlines for example, where you advertise very cheap seats but when you try to book, the seats are not there. Ignoring the depth of book is not useful.”

Ah yes, the old apples and pears difficulties of comparing the full execution, clearing and settlement cycle, although there has to be some truth in Hirander’s claims or why would Chi-x have picked up so much market share off the incumbents over the last two years?

There were also some key notes of substance during this panel as well, such as Rainer’s closing comment that you cannot ignore the depth of the book when comparing execution venues.

Mark Hemsley counteracted that liquidity flows to BATS because they have “tighter prices, a diversified customers base and no dependence upon a single order flow”; whilst Hirander talked the fact that regulations mandate Best Bid-Offer (BBO) reference pricing which, without a consolidated tape for a European BBO (EBBO) style service – which Equiduct offers if anyone’s interested – then you cannot achieve this BBO capability.

Equally, Hirander stated that you need EBBO with Volume Weighted Average Pricing (VWAP) to make it really work.

True.

John Wilson agreed, but clarified that a mandated tape would be a bad thing because it would create latency issues and challenges in determining where to take the prices from.

In fact, the entire panel felt a consolidated reference pricing on a single tape would be great, but that is should not be a regulatory requirement. The Chairman Andrew of Morgan Stanley then made the most telling comment: “fix it or we will be regulated”.

Also true.

There was also a clear view that the clearing and settlement area is a problem, with Mark Hemsley of BATS saying it was “a joke” due the log jam of requests for change. “We will go out of our way to support those clearers who create interoperability”, and that there was room for three pan-European CCPs maximum.

John Wilson of Baikal agreed, saying that interoperability of CCPs is critical which is why CCP intermediation is increasing. With intermediation increasing, CCPs are now concerned about disintermediation, which is why interoperability and risk models are being opened up for discussion between the Clearing & Settlement Mechanisms (CSMs).

Charlotte Crosswell, CEO of NASDAQ OMX, speaking in the next session added a nice little sound bite to this debate, when she said that it didn’t matter if they were 0.1 or more basis points better on price discovery if “the elephant in the room – clearing and settlement – was not solved.”

Implication: EuroCCP and EMCF are going to get the full support to lean on Eurex Clearing and Euroclear to make change happen.

Rainer Riess then countered with a view that the Code of Conduct had created transparency and debate, and that there is competition so we do not need more regulation. Equally, in the clearing space, you have to remember the issues of risk and that interoperability between two CCPs is hard to control. “An integrated vertical silo is needed and we can do that in that we can marginalise across asset classes”. Rainer finished with the view that you “must balance competition against market integrity”.

Implication: Deutsche Bourse with Xetra, Eurex and Eurex Clearing has the straight-through processing under a single umbrella for end-to-end trading clearing and settlement … if you want to avoid risk and / or prefer a more single provider (competitors call ‘monopoly’) approach.

All in all, a great panel session.

I’ll write about the other panel on the future of European trading venues tomorrow. That one comprised:

• Cees Vermaas, Executive Director, Sales and Relationship Management, NYSE Euronext and NYSE ARCA EUROPE MTF;
• Hugh Brown, Head of Secondary Markets Product Development, London Stock Exchange Group;
• Eli Lederman, CEO, Turquoise;
• Charlotte Crosswell, President, Nasdaq OMX Europe;and
• Artur Fischer, Joint CEO, Equiduct Trading.