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Tony Whalley, Scottish Widows: sell side and buy side need to interact better |
Since news broke in November about Project Turquoise, the alternative trading system being put together by seven leading investment banks to challenge Europe’s stock exchanges, the consortium has revealed no details of its plans other than the appointment of a clearing and settlement solution led by the US Depository Trust and Clearing Corporation and Citi, in March.
It’s hard to know for sure whether the lack of detail is the result of a decision to maintain secrecy or if it’s simply because the consortium of rival banks has made little progress. Either way it’s starting to annoy the investment banks’ clients.
"The sell side needs to interact better with the buy side," said Tony Whalley, investment director and head of dealing at Scottish Widows, speaking about Project Turquoise at Trade Tech, an industry conference in Paris, late this April. "We should be getting answers as, presumably, we’re the ones expected to provide the liquidity. But so far there has been a complete wall of silence. If these answers are not forthcoming, there may be less enthusiasm to support it."
Lack of confidence
The investment banks’ explanation that they are not being secret per se but not saying anything because they don’t want to detail a plan that might make them look stupid if they couldn’t stick to it, does not inspire a lot of confidence.
With Instinet’s Chi-X pan-European ATS already up and running, the banks behind Project Turquoise will need to start impressing people soon if the project is to be successful.
The success of ATSs in Europe is by no means guaranteed to follow the experience of the US market, in which ATSs managed to grab a large share of the market from incumbent exchanges in the late 1990s. Whereas ATSs in the US introduced a radically different way of trading – electronic order books – to an inefficient market dominated by floor specialists, European markets are already served by efficient central limit order books. What ATSs have to compete with is therefore not fundamentally different but rather differentiated mainly by price and speed.
Incumbent exchanges in Europe, which just returned another set of record results, are also well positioned to compete after years of strong profits.
"There is a good chance for one or two of these new systems to succeed but you won’t see them taking over everything," says Simon Nathanson, CEO of NeoNet, an electronic agency broker and DMA provider. "National exchanges won’t stand still but will meet competition from these new players with lower fees and improved functionality. Moreover, there will always be a role for local marketplaces for small- and mid-cap stocks."
New liquidity
Investment banks argue that faster, cheaper trading will attract more liquidity and make the marketplace more efficient. Goldman Sachs, for one, believes that a 30% reduction in exchange costs could boost liquidity by as much as 50%. Chi-X, which claims to offer trading that’s 10 times faster at one-tenth of the price, believes that by offering a platform that will make statistical arbitrage funds more economical in Europe, the market can attract new sources of liquidity.
Not everyone, however, is convinced that cutting fees automatically encourages more liquidity.
"I’m a mild sceptic that exchange fees have a big influence on volume," says Jim Gollan, CEO of Virt-X. "As a mutually owned exchange group, fee breaks are one of the main ways through which we return surplus income to our members. Judging from the results of a three-month fee holiday that we recently gave, the evidence that fee cuts increase volume is inconclusive. While our volumes did increase, the increase was largely in line with volumes in the wider market."
Whether or not Project Turquoise or any other ATS succeeds is ultimately of less interest to investment banks than the value that even perceived competition can have on fees, which a number of exchanges have already begun reducing slowly.
"We’re platform neutral," says Robert Barnes, managing director for market structures at UBS, "all we care about is fees."