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Already offering cheaper, quicker pricing on French, German, Dutch and UK equities, Chi-X is the first tangible evidence of the challenge to Europe
First-mover Advantage?
“… to a large extent we’re bringing new liquidity to the market, new business that couldn’t previously be done in Europe, …”
What was the genesis of Chi-X?
In some ways, Chi-X has been many years in the making. A lot of people involved in Chi-x have been in the industry for a long time, looking at how we can conduct equity trading in a faster, cheaper and smarter fashion. But Chi-X is also a child of the regulatory changes that MiFID is unleashing. The genesis of Chi-X is the coming together of four elements: the connectivity options within Europe; the technology of the fourth-generation trading systems; the regulatory environment; and of course growth in market demand for electronic and, more recently, algorithmic trading and DMA access. If you put together the changes in regulation, technology and client demand, you’ve got a product. Chi-X is not the only answer by any means, but it is a credible and so far successful attempt to deal with the challenges the industry is currently facing.
From your launch announcement in September 2006, Chi-X has accelerated to a published share volume of 367m in September 2007. Are you surprised at the level of success so far?
We’re pleased to be in a strong competitive position. First mover advantage in the financial markets can be important, but I’m not surprised because I know the complexity of the work needed to get us to where we are today. Some of that work was relatively straightforward and some was among the hardest I’ve ever done. We’ve found one solution to the equation, but there are many potential solutions and I’m sure we’ll have more competition.
Over the years many have tried and many have struggled to gain traction and attract liquidity (such as Tradepoint, and the LSE’s Dutch trading system). Before launching Chi-X, we spent some time considering why this has been the case and have taken the considerations into account. For example, not only is Chi-X a low cost, high speed alternative, but it introduces an attractive pricing model and open access via FiX connectivity protocols. Some are surprised that we’re showing modest but vital signs of life as every single attempt until now has failed to thrive. And although there’s an element of surprise that we have done what we’ve said we’d do, it has been many years in the making.
What were the biggest hurdles to the creation of Chi-X?
There were three main challenges. The first was to ensure that our market model was able to answer the various demands of customers, i.e. to handle the characteristics of stock trading specific to Europe. The second challenge was perhaps the most significant: to offer customers a fully anonymous and centralised clearing and settlement solution. We worked with customers and partnered on a non-exclusive basis with Fortis to develop the EMCF (European Multilateral Clearing Facility) initiative, which has proved very powerful in allowing a reduction in price, increase in competition and a credible alternative to the mantra of the incumbent providers that the only solution is consolidation. Monopolies appear to believe that only by building even stronger monopolies will they one day be in a position to lower prices. I don’t think that the market has ever believed that. The third challenge was that we had to take a view 18-24 months ago on what actually MiFID meant. And there was no one 24 months ago that was willing to provide a clear, executable interpretation. So we had to sit down and decide for ourselves. That was a big risk to take. Fortunately thus far we seem to have called it more or less right. ...