AIMING HIGH.
Competition may be intense but Christian Bower, commercial director, Quote MTF believes there is definitely room for one more execution platform.
Q. Is Quote MTF still on target for the April 4th launch?
A. Yes we are. We have publicly confirmed a minimum of eight liquidity providers committed to the platform via our equity participation programme. In many ways it feels like we have been an F1 racing team with an optimised car that has been raring to go, and finally we have secured our crew of drivers.
The trading companies who have become our liquidity partners are drawn from the UK, France, the Netherlands and Ireland, some having US parentage. We have had to bide our time but support has rallied behind Quote MTF and I think one of the main catalysts for this has been the current wave of consolidation, such as the proposed mergers between Chi-X and BATS, the London and Toronto Stock Exchanges, and Deutsche Börse and NYSE Euronext. These mergers are unleashing further pressure for a sustained number of lit platforms to keep user costs competitive and optimise trading opportunity.
Q. What market share are you aiming for?
A. Our immediate target is €1bn in average daily traded volume and we hope to achieve this as quickly as possible, but certainly by year end. We are aiming for a 5-6% market share in pan-European equities over the next 18 months but there is no doubt that the business environment is much tougher today than four years’ ago when Chi-X launched. While we have the advantage of more liquidity providers signed up from the outset – other platforms I understand had three or four passive participants and quickly gained market share – today’s participants are pressed on technological resources and are cautious where they spend tighter budgets.
Equally, having seen several venues fail, participants are much more focused on whether you have a sustainable business model and the trading / business case of why they should be using your platform. That said, because the pioneering companies have explained the MTF concept, we’re not having to start from scratch as they had to. Indeed, the brokers have already invested heavily into the technology required to cope with fragmentation, so the cost of adding new venues to smart order routers, for example, is much lower.
Q. There are many MTFs in the marketplace and consolidation is taking place. What are your differentiators?
A. To me one of the biggest differentiators is that we have an efficient business model. We run at a fraction of the cost of the existing MTFs and our breakeven point is considerably less than what is required by other alternative venues. While our operations are hosted at the Interxion data centre in the City of London, and we will be clearing all trades through the EMCF (European Multilateral Clearing Facility), we achieve our cost efficiency by leveraging technology and operational capacity across platforms, and gravitating to lower cost centres of business. This latter point has been particularly important as we build out our regulatory and supervisory divisions in the wake of pressure from the European Regulators.
This economic longevity argument means that we present a truly viable solution for sustained market competition and that the intellectual and technological investment made in dealing with fragmentation will continue to serve a purpose. It also reduces price pressure on us and allows us to be competitive while delivering the highest quality of service.
Our exchange fees sit at a floor-breaking 0.14bps for taking liquidity and we will continue to cap our fees at €14,000 until 2012. This will ensure that we can pass these savings straight on to the end users.
Q. Why did you decide on equity participation and not giving rebates?
A. From the outset it was our intention to develop the business organically with the brokers attracting the passive providers. Most recently we have been strongly led by market participants who advised us to maintain the differentiator in our fee structure. We are offering our participants a 40% stake in exchange for liquidity. This effectively creates an alternative mechanism of inducing passive flow but, we feel, aligns the interests of the trading firm more closely with the business. By offering liquidity providers ownership in the company they are more incentivised to contribute to the platform’s long-term success, which also helps to remove some of the criticisms surrounding high-frequency strategies.
Q. Who do you view as your major competition?
A. Some people would say that any venue in the lit market is a competitor, but look it at from a retail sector point of view. Take Philip Green [Sir Philip Green, boss of UK retail group, Arcadia – Ed.]. He opens several shops on a high street, which to some extent compete but together make the high street a more attractive market place to visit, increasing choice, competition and expanding the hinterland. Equally, it has not stopped him expanding his portfolio of stores, or stopped other shops from opening. The combined force of these shops has attracted people to this area and this creates volume and trading in its own right. I think the same thing applies to the trading venues. Rather than the various lit venues viewing each other as competitors, I think we all value each other’s existence. In fact, I have had good advice and guidance from heads of other MTFs. I think a fragmented market is a positive thing in that it gives people choice and ensures accurate pricing. I also believe that Quote MTF could benefit from the merger between Chi-X and BATS’ MTFs in Europe in that they have similar users, some of which could look to diversify and utilise additional platforms.
Overall, I reckon the optimal size for the market is about six to ten liquidity pools. In many ways it will be like the development of the ATMs in the banking industry. People needed to see enough coverage, and continuity of coverage, for the concept to exist, but then are impartial about who the operators are as long as they get the right service, efficiencies, price and technology.
Q. What impact do you think the regulation will have on the company?
Ironically, in many ways Quote MTF is symbolic of the current regulatory ideology. We are a lit pool and have no intention to launch a dark offering or smart order routing services. This fits into the current environment where regulators are placing a great deal of emphasis on transparency. There are several discussions over how to classify dark pools and broker crossing networks. I think the regulation that is being proposed will drive some flow back to the lit market and may force some of the firms to change their model.
Q. Looking ahead, what do you see as the industry’s biggest challenges?
The traditional exchanges are going to find it increasingly tough to remain viable in equities trading but they have an important role to play and the MTFs are there to take up the slack for equities as they refocus on other business areas and product types. From MiFID II and ESMA specifically, we anticipate heightened regulation and surveillance and to that end we are spending serious money on personnel and technology to comply with future rules. Some of this endeavour will focus on cross-venue surveillance and working with the regulators to provide the attributed audit trail or large trader ID data they require. And of course we are all in the hands of fate when it comes to investors’ appetite for equities. Another downturn in volumes could wipe out additional trading venues, so keeping operational costs low is crucial.
