Eight years ago, Aquis Exchange made the decision to prohibit non-client prop trading flow from crossing the spread – essentially banning high frequency trading from its platform. The move was a game-changer for the firm, but it has now decided to reverse its decision. BEST EXECUTION speaks to CEO Alasdair Haynes to learn why.
At 7am this morning Aquis announced its intention to change the proprietary trading rule on its UK and EU trading platforms in its Aquis Markets division.
The rule, which banned aggressive non-client proprietary trading, was introduced by Aquis in 2015 with the goal of reducing market impact and signalling risk. In a surprise U-turn Aquis will, as of October 2023, once again allow liquidity providers the option of interacting with “aggressive non-client proprietary trading”. In essence, it is welcoming high frequency traders (HFT) back onto its platform. But why?
“We’ve done a huge amount over the past 18 months, such as with periodic auctions and the new Market at Close (MaC) order type,” says CEO and founder Alasdair Haynes, speaking to BEST EXECUTION. “But it was time to reflect on the lit book, because it was pretty clear to us that we were only capturing a percentage of the market.”
The initial decision to exclude prop traders was a crucial part of the Aquis journey. “It was that rule change that made us truly different,” Haynes told BEST EXECUTION back in May, celebrating the firm’s 10-year anniversary. “The liquidity profile of Aquis was unique and afterwards, we suddenly had this massive pool of liquidity. That’s when market share started to grow.”
In fact, Aquis grew so quickly over the next two years that by 2018, it went public. But times have changed…
Read More: Retrospective: All Grown Up – Aquis Turns 10
Today’s current challenging market conditions are conducive to prop trading, as traditional asset managers step back and liquidity becomes scarce. And this has necessitated a change in tactics.
“We could see that we were missing out on some flow,” admits Haynes. “We spent a lot of time studying the issue, and it was clear that banks were supplying very little liquidity to us because of our time of execution.”
In basic terms, Aquis was missing out because it didn’t have HFT flow, so submitting an order was taking too long to execute.
“That was the pay-off between time to execution and toxicity,” says Haynes. “So we thought, what would happen if we allowed this prop flow to come in and aggress – primarily against bank orders, because that’s what they want? Some market makers might say, well we don’t want it to aggress against us. But the way around that was to create harmony amongst the liquidity providers by giving them what they want – the choice whether or not to aggress.”
The cautious feelers that Aquis initially put out to the industry received surprisingly positive feedback. “People think that market makers all trade in the same way, but they don’t. They’re all very different in their styles, and we realised that if we want to grow and get to the next stage of our business, then now is the right time to compromise.”
It’s a big decision, and one that – since the company went public – is likely to be price sensitive. Some might even call the move defensive. But Haynes disagrees.
“When we introduced the rule, we said we would always continue to adapt – we never said that this was a permanent fix. This decision is not a defensive move, it is a positive step. We are responding to changes in the market, rather than resting on our laurels.”
“This decision is not a defensive move, it is a positive step. We are responding to changes in the market, rather than resting on our laurels.”
And times have certainly changed. Time to execution is now crucial, while quantitative analysis has evolved beyond all recognition. “We and other firms now analyse literally down to microseconds the difference in the markouts of a stock,” explains Haynes. “What happens at the point of trading, what happens immediately after to the spread, how does that impact execution performance – all of this analysis was not available at this depth eight years ago. But although our markouts are great, it wasn’t driving new flow.”
Why? Because for banks, it turns out that the issue of immediacy overrules everything else. Hence the U-turn.
“We realised that we weren’t going to get that flow unless we have more people aggressing on our platform. So to grow it in any real scale, we’ve now got to ask the people who weren’t allowed to aggress before, to come in and trade with that.”
The firm is expecting positive results, and hopes to see banks boost their passive flows in order to trade against market makers.
“We anticipate liquidity growing, market share growing, and more banks becoming involved in our trading,” Haynes confirmed to BEST EXECUTION. “I’m not expecting market share to grow overnight, but I do think it will grow materially in the medium-term.”
So what next? Aquis has made no secret of its ambitions to be a top three player in Europe with a 10% market share. Will this move help or hinder that?
“I have not changed my views on what we can achieve,” emphasised Haynes. “If anything, this decision will help us get closer to our goal.”
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