ALIVE, AND MORE THAN KICKING.

It may have seemed like a long time coming, but Turquoise is finally up and running. Expectations are running high but Eli Lederman believes the trading platform can fulfil them. He talks to Best Execution about the reasons he joined and his hopes for the future.

My first question is why did you decide to leave Morgan Stanley after such a long career with the bank?

I had a good career at Morgan Stanley but I thought Turquoise presented a fantastic, as well as challenging opportunity. The timing was also great in that thanks to MiFID, the market environment is changing from being monopolistic to one where there are several commercial possibilities. Our goal is to provide a better trading service with the new technology available and I believe that my experience with Morgan Stanley has helped. I also see Turquoise as a pure play in that it is a small organisation focused on one thing versus a large investment bank which has a portfolio of businesses. However, there are many things from the culture and approaches to work at Morgan Stanley that I am working to replicate.

From the tortoise on your shelf, I know you are well aware of the criticism and the nickname Turquoise was given. Can you please explain why it took longer than people expected to get off the ground?

It takes time to build an entrepreneurial and complex company like Turquoise. In the beginning there were no employers but just part-time people from the nine investment banks who are the shareholders. In a sense it was being operated as a project by a consortium, but last September we decided to reconstitute Turquoise as a company. The foundation had been laid and we then had to go find the right calibre of people to head the different divisions such as technology, operations, legal and compliance. We had to make sure that we chose people with the right backgrounds but who were also dynamic and entrepreneurial.

Who were some of your hires?

We hired Yann L’Huillier (former chief investment officer of the Boston Stock Exchange) as chief technical officer, Adrian Farnham, seconded from his day job at Morgan Stanley during 2007 to work on Turquoise, is now chief operating officer and Duncan Higgins, formerly of UBS, is head of client relationship management. Ian Werner, who was compliance manager of the London Stock Exchange is our head of legal and compliance. Altogether, we have 40 people from different disciplines and we are planning to expand as the business grows.

What do you think are Turquoise’s differentiating factors?

Turquoise will feature both a conventional displayed order book as well as a dark pool for anonymous orders. It will be possible for the dark orders to meet the light orders, which is an important factor because it gives the dark book the opportunity to attract small order flow. The aim is to have high cross rates available to our members which today number over 50. The minimum order for Turquoise’s dark pool is Euro 500,000, which is up to 20 times more than the average trade size. I think traders with large orders, or significant orders in less liquid names, will be comfortable with having them in the dark pool, where they can find the other side naturally and even benefit from crosses against the light orders. Overall, our approach is designed to increase matching rates, improve execution and minimise information leakage. We will offer trading in all 1,267 stocks in the dark pool – but also have an open order book trading for the 270 most liquid stocks.

Another difference is that we chose EuroCCP, (the European venture of US-based Depository Trust Clearing Corporation) as our clearing and settlement partner. Chi-X, NasdaqOMX and Bats Europe have all appointed Fortis Bank to handle clearing, EuroCCP will act as the single pan-European clearing platform for all Turquoise trades. The European market has a very fragmented structure at the moment and I think the combination of us and EuroCCP both offering pan-European platforms will help to steer that fragmentation.

Were you happy with the soft launch?

We prefer to call it limited live trading. This went very much as we expected and wanted it to in that it went according to plan and passed without any real issues or problems. From 29th August we opened the gates on the rest of the share universe and began trading in each of the 1,267 stocks in 13 countries. From the middle of September all of the founding shareholders will have begun market making in the most liquid 270 stocks and Turquoise will have fully completed the launch process.

Does it concern you that expectations are running so high for Turquoise?

I agree, expectations are running pretty high but we plan to meet them as quickly as possible. Over time, I think Turquoise will develop considerable market share in the transparent and dark book, although the dark pools may take a bit longer.
Shortly after we officially launch, I expect to see 5% market share. There are a growing number of platforms but we are also in a market environment where people are looking rather ruthlessly at their technology spend. They have to justify the cost for linking to the front end of a trading platform but also for the maintenance. Users will also be looking at the differentiating factors between the business models. I think our quality of execution, cheaper clearing as well as no membership fees will mean that users will not get a better price on another platform.

There was a lot of hoopla over Turquoise opening earlier than the LSE and Deutsche Börse. What made you change your mind?

There was a misperception in the market. Our plan was that this was always going to be a temporary measure. We were not looking for a competitive edge but doing it because the participants agreed it was a way of helping us to get critical mass and establish ourselves as a competitive platform. Once we achieved that critical mass, we would open at the same time as the LSE and Deutsche Börse and the other European marketplaces. However, we took the decision not to after we encountered threatening behaviour from the established exchanges. They said they would open earlier if went ahead with our plan. It really does not matter in the grand scheme of things and their behaviour makes me more confident about the likelihood of our success.