Since launch, more than 95% of Order Submission Requests (OSRs) resulted with firm orders within the specified time window – under half a second – and with both price and size parameters which pass the minimum requirements of the service defined with input from buy-side and sell-side users. Furthermore, in more than 90% of all OSRs, the firm order not only met the minimum requirements but also was at least the full size of the originating block indication.
Jonathan: A key advantage as a venue is the ability to utilise the conditional order type. The conditional order type effectively allows us to continue working an order independently, whilst still having potential exposure should liquidity opportunities arise. Whilst, conditional order types are not a new phenomenon in themselves, this was the first example of widespread engagement via brokers in Europe and helped us address numerous concerns, including the real fear of missed opportunities by residing in one venue when liquidity is actually in another. By using conditional orders, the opportunity cost is minimised. Now, whilst Turquoise may argue that this was not the original intent of the venue, this becomes incredibly important in a post-MiFID II world where 4/8% caps on dark will most likely drastically change the European liquidity landscape. One way round this, currently still available via MiFID II proposals, will be the Large In Scale waiver but there-in lies the rub. Current trading behaviour (by both us and our peers) seeks to distribute the order among a variety of venues, thus reducing the opportunity cost of missing liquidity, rather than rest in one sole venue. In a LIS world, there will be much fewer orders that will have the ability to be distributed amongst a variety of “dark” venues and still maintain the LIS integrity per venue. Conditional orders help alleviate this by allowing a virtual presence in Turquoise Block Discovery and thus not disrupting our workflow, a very powerful liquidity-seeking tool in the trader’s arsenal.
Increasing routing flow
James: From a technology perspective, we’re fully operational, but we did spend a lot of time optimising our work flow. Routing to a venue where you’re sometimes trying to send as large an order as possible (albeit conditional), requires some careful development.
From a client perspective, we’re doing all we can to present the benefits to our clients. An awful lot has been done in the UK already, and we’re building momentum in Europe. But we need to do more to engage with our US clients, who perhaps aren’t as involved with how the overall European market is evolving. The industry has an opportunity to help build solutions to the liquidity challenges we face, and we believe Turquoise Block Discovery is one of those solutions.
Turquoise publishes weekly stats, so we can see that we’re a significant % of the executions. We’re continuing to sign up clients, but it’s important that the wider market engages. It’s crucial that the sell-side supports the full conditional service; otherwise you simply won’t see enough large blocks crossing.
The buy-side perspective
Jonathan: Whilst Turquoise Block Discovery would not suit all needs or all order profiles (nor do they profess to do so), they do provide a compelling solution to a variety of questions regarding liquidity-sourcing and order-routing in a post MiFID II world. The problem is that currently there is no incentive to move directly to an LIS model or at any point until it is forced upon us by MiFID II. Average trades sizes are fractions of LIS and current behaviour still needs to account for the large proportion of volume occurring in these smaller trade sizes. The dilemma then is how to transition market behaviour from small dark fill sizes to large-in-scale dark fill sizes in a manner which smoothes out the issues and kinks along the way. There are clearly venues where similar behaviour takes place currently, but there are several key differences which set Turquoise Block Discovery apart from this and would thus require a change in trader behaviour. The good news is that Turquoise, the sell-side, and the buy-side are all enthusiastic in their drive to find a solution to this and I believe these discussions will drive how our engagement changes with Turquoise Block Discovery and other venues over the coming year and more.
How important has it been for Turquoise to have a buy-side user group?
Robert: Buy-side participation has been integral to defining reputational scoring and other key features that work through sell-side algorithms that access Turquoise Block Discovery.
While, MiFIR Article 4(1)(c) can allow dark trading for orders received by a venue that are LIS compared with normal market size and not include them in the MiFID II double volume cap calculations, the challenge is to increase size of marketable orders where today less than 1% of trades on European order books trade in sizes greater than LIS.
The total value matched since launch is above €1 billion. While this amount is niche relative to the addressable market for electronic block trading, Turquoise Block Discovery has a profile – 50% of Turquoise Block Discovery Block Indications and 50% value traded already are in sizes greater than LIS – that is ripe for more activity into quality workflow that features low reversion, large average fill size, and high firm up rates.
Both buy-side and sell-side tell us that the way the buy-side works orders will have to evolve, and therefore we look forward to continuing our constructive cooperation with buy-side and sell-side.
Jonathan: The question can be expanded out from this to discuss buy-side user groups in general. As previously mentioned, MiFID II could prove to be a major disruptor to current market practice and there have been various innovations proposed amongst several market constituents. It is thus incredibly important for buy-side counterparts to get together and discuss advantages and short-comings of potential solutions to MiFID II-shaped problems and, in fact, market structure issues as a whole. Through intelligent debate we will be able to move forward as an industry in a way which would best serve our end investors, rather than working separately, championing different individual projects, ultimately increasing fragmentation, raising costs and hurting our clients.
With respect to Turquoise Block Discovery, it was through discussions within the buy-side group that we were able to increase practical (rather than theoretical) understanding of the mechanisms behind the venue and take comfort that our views were not extraordinary and which eventually led to its implementation.
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Finding Blocks – A Case Study – Industry Collaboration in Action
