Last month's outages at the London Stock Exchange sparked a flurry of activity at the MTF's, with both Chi-X and BATS citing the outages as firm evidence that the MTF's liquidity flows are now sufficient to sustain an orderly market with or without the LSE, and specifically that they're now viable price dicovery venue's in their own right. Seeking to substantiate these claims, BATS recently produced their own white paper outlining their analysis of the liquidity patterns observed while the primary market was down. Automated Trader's David Dungay caught up with the author of BATS' white paper, Paul O'Donnell, COO of BATS Europe.
Paul, do you think the MTFs have moved past their role as an arbitrage venue? Your report highlighted some very interesting statistics.
Yes I think the evidence is quite clear when you look at what happened on November 9th. We didn't actually publish the same level of detail but if you look at what happened on ING and Euronext a week or two before that, there was a very similar pattern. In an orderly transfer of a market after a shut down the MTFs absolutely have enough liquidity to sustain the market. In fact there are several FTSE stocks now where the LSE aren't even the biggest player.
What do you make of the decision to put the market into an auction and what do you think this spells for the future?
I think a lot of the trading firms were taken by surprise. There were several participants that wanted to trade but couldn't because of the auction flag. We've heard from several firms that they have high priority internal projects going on to fix that, so if this scenario occurs again, they will just be able to continue trading. Also, as we said in our report, there needs to be some market consensus about how these things should be handled.
Clearly you feel that given the opportunity the MTFs have enough liquidity for price discovery but do you think the mindset of traders has changed and perhaps they now have more faith in the MTFs?
Do you know why the LSE had this problem?
Not specifically, but it is a technology issue.
How smoothly and quickly do you see the integration of MillenniumIT technology?
The LSE has said next year but it is a major transition and one that we anticipate will take some time.
How do you see competition heating up in Europe over the next year or so? What kind of reaction do you see coming from the LSE?
Our broad view on competition across the board, not just with the LSE, is with any defined market segment we don't see any one trading platform as capable of sustaining more than probably 30% market share. The market wants competition and won't allow it. If any exchanges then confine themselves to one segment, like just the London market or just the Italian market, then they will have just 30% of that. The only way forward for exchanges is to try and be 30% of all of Europe and have a pan European strategy; but so far none of the exchanges, they have all tried, have demonstrated any kind of pan European strategy. The LSE have Baikal which hasn't had much success thus far. NASDAQ OMX is probably the best of all the efforts but that too isn't particularly big. They have got to figure out how to be pan European either by kick starting their initiatives or some sort of consolidation. Otherwise they are going to end up at 20-30% of their home market.
How many trading venues do we need in Europe and how many do you think there will be in twelve months time?
I think you will have somewhere between three and five, perhaps not 12 months but in 24 months, pan European platforms with somewhere between 10-30% market share each. There will be new comers but the core of the market will be some manageable number of pan European platforms. All of these vertical exchanges will have to adapt somehow.
You say, and provide evidence, that the MTFs are capable of price formation but how long do you think it will be until they do fully?
Well they do already. We didn't put it in the paper but we do
have figures. We looked at, over the day, the amount of liquidity
on our book and the spread on our book for those stocks. There
were 8 stocks in question on the 9th November. Looking at the
graph for most of those stocks, you couldn't tell that anything
had happened. The liquidity on our market didn't change and it
was absolutely rock solid the whole way through the outage. It is
absolutely the case that when the LSE is gone there is enough
liquidity to sustain the book. The problem we had on the 26th was
not one of price formation. It was a problem of the LSE
distributing an auction flag to the market that wasn't real.
So you are feeling positive about the future?
Yes. We are picking up market share on a daily basis. Right now we are at roughly 9.5% of the FTSE and like I said there are a handful of stocks on the LSE that are down in the 30s.
How do you feel about the possible acquisition of Turquoise by the LSE? What do you expect to happen in terms of market structure if this goes ahead?
In the short term it probably won't affect it much. The question will be what will the LSE do with it and how will they decide to compete with it, and how the MilleniumIT integration will work.