01 May 2008, Ryan Davidson, Risk magazine
Two MTFs are currently live – Chi X, launched in March 2007, and Euro Millennium, launched in March this year. Credit Suisse was connected to both from their launch. “Our aim is to provide best execution for our clients, which means we trade on the venues that have the best liquidity and prices. We save approximately 4-5 basis points by trading through Chi-X compared with European exchanges, and these better prices are passed on to our clients,” said George Andreadis, London-based head of advanced execution services (AES) liquidity strategy in Europe.
Meanwhile, New York-based broker Instinet gains an average of 2.5 basis points price improvement by trading through Chi-X compared to the price on the underlying European exchanges. “The MTFs that have launched in Europe over the past year have, overall, had a positive effect on trading – they have lowered latency, narrowed spreads, and offer more sources of liquidity,” said Richard Balarkas, chief executive of Instinet Europe.
MTFs are trading platforms that were allowed under the European Union’s Markets in Financial Instruments Directive (Mifid), which came into force in November 2007. One of Mifid’s aims is to promote greater competition in share trading in Europe and MTFs are a response to this.
“Most financial firms are pleased with the cost savings that the consequences of Mifid regulations have brought them, such as trading on MTFs,” said Peter Randall, chief executive of Chi-X Europe, at a conference on financial regulation on April 15. On Chi-X, the investment community can see what trades have taken place, as on a normal exchange. However, Euro Millennium is a so-called dark pool of liquidity, which means trade data are only available to users after they have executed a trade.
To get around this problem, Credit Suisse’s Andreadis said various smart order routers are key. The smart order router collects bid-offer spreads from open exchanges, and also calculates probabilities of execution for dark pools based on historical trade data, to determine which dark pools will be likely candidates to offer good price and liquidity.
More MTFs are set to launch over the next 12 months, such as Project Turquoise in September. Firms that plan to trade on Project Turquoise can expect to do this for one fifth of the price of trading on European exchanges, including transaction, clearing and settlement fees, according to its spokesperson.
“I am surprised there aren’t more MTFs in use already, given Mifid came into force last November. We are keen to see more competition among trading venues, as this will bring more sources of liquidity and encourage exchanges to reduce their costs and latency in order to compete,” said Instinet’s Balarkas.