GOING PUBLIC.

Mark Hemsley, CEO of BATS Chi-X Europe talks about life as an exchange

What are the benefits of recently becoming a fully-fledged stock exchange?

One of the main benefits of being a recognised investment exchange (RIE) is that we can now broaden our customer base among the retail and the more conservative institutional fund managers. Some fund managers and retail brokers across Europe have not updated their mandate to allow trading on MTFs. Our new RIE status means that they are now able to connect to trade with us. Our current customer base represents a wide range of investment firms, but retail investors have largely been under-represented. They have yet to benefit from the competitive advantages brought about by MiFID and we aim to change that. One of our main differentiators is that we can help local brokers build their franchises and lower costs by offering easy access to the pan-European market.

Did you have to make any significant changes?

We made subtle changes. As an MTF, we always significantly invested in risk management, market surveillance, compliance and regulatory tools and resources. As an RIE, this will continue and our plan is to further enhance our technology, products and services.

Are there any geographies that you are particularly targeting?

We trade securities and have strong liquidity in 15 European countries. Over the past year we have been particularly focusing on increasing our market share in Spain. It had been a difficult market due to the complexities of the short selling ban, as well as their clearing model, which was different compared to other countries. However, improvements have been made in the clearing process and the local regulator CNMV (Comision Nacional del Mercado de Valores) has also lifted the short selling ban on all stocks. There was a great deal of pent-up demand and as a result we are experiencing a significant and sustainable increase in flows which has boosted our daily market share of Spain’s IBEX35 to over 14%. For the six biggest stocks within the IBEX35 our market share is even higher, representing between 23% to 30%.

 What would you say have been the advantages of the acquisition of Chi-X Europe over the past two years?

The integration was seamless. We closed it on 30 November 2011 and completed the integration by the end of April 2012. We have seen tremendous cost saving benefits in terms of synergies across technology, data, communications and office space. We are also able to offer separate order books for our two lit markets – BXE and CXE – as well as for two books for dark trading. We reviewed our pricing structures. In our BXE book we have no rebate for makers and a 0.15 basis point charge for takers. In our CXE book we have a 0.15 basis point rebate for makers and a 0.3 basis point charge for takers. The new tariffs differentiate the books by separating order flow between firms according to their trading strategy and focus on cost. The trade-off is deeper liquidity for a slightly higher fee; the change seems to have resonated with our customers and we have so far held onto our 22% to 23% market share.

What was the driver behind your latest deal – the purchase of a 25% stake in a new clearinghouse created by the merger of Amsterdam’s European Multilateral Clearing Facility (EMCF) and the Depository Trust & Clearing Corporation’s EuroCCP?

The main drivers are to create economies of scale and drive down costs and facilitate consolidation. There are too many clearinghouses in Europe and I think the combination of EuroCCP and EMCF is a significant step in the right direction. Together, they will deliver substantial savings in terms of reduced settlement fees, decreased levels of margin and funding costs, as well as through the elimination of one set of exposure to loss sharing and the funding costs. Further savings for customers will be achieved by the reduction of membership fees, IT and connectivity expenses. We are strong supporters of the open-access or horizontal model and we want to ensure that it continues.

Will you attempt going back to the market? If not what are the future plans?

We keep our eye on the market but a BATs IPO is not a main focus. We are finishing off the RIE process and as I mentioned hoping to increase our customer base. We started by focusing on the biggest stocks and customers and now we are looking at further developing our retail, regional and smaller customer base across Europe. We are also looking at the depositary receipt business, which we launched around three years ago. We had around 2% to 4% of the market but we have doubled our share in the past year to 8.1% through May. Russian companies are a big part of the market and while there is a push in the country to have them to list on their local markets due to the changes on the Moscow Stock Exchange and introduction of a central securities depositary. There is still demand to trade in depository receipts in Western Europe.

We are also exploring the exchange traded funds market in greater detail. We are looking at how we can create a more liquid pan-European ETF market by using trade order routing techniques that are well established in the equities markets. Our pan-European low cost offering is well placed to prosper in low volume environments and is highly scalable as volumes increase.

What impact do you think regulation such as MiFID II and the Financial Transaction Tax will have?

MiFID I was designed for competitive reasons but MiFID II is much more political with the focus being on, among other things, dark trading and high frequency trading. You have to keep negotiating and ensure that when it comes to dark trading that regulators are making changes that are creating a good market infrastructure.

As for the FTT, there is a lot of complexity and it is a worrying development for exchanges. Although volumes have bounced back after the introduction of an FTT in France, Italy’s levy has proved to be disruptive. The proposed EU FTT under discussion will also prove damaging to the equity markets at a time when regulators are looking to these markets to raise money for small and medium size companies. If it goes through it will only make it more expensive to do business. I don’t think we will see anything FTT zone wide until well after next January, but even the discussions are putting trading firms off the European market. I hope common sense will prevail.

Looking ahead, what do you see as the biggest challenges? 

Probably the biggest challenge to our industry is the uncertainty in the global economy. If the U.S. economy continues to improve that could counter the challenges facing the Euro-zone. If we see a notable rise in bond yields, that in turn could help lift equity volumes. Separately, the uncertain regulatory environment remains a cloud for all investors. Until there is clarity on looming regulatory changes, all investors are disadvantaged.