Significant regulatory change in the European securities landscape from the Markets in Financial Instruments Directive (MiFID) and the New York Stock Exchange (NYSE) merging with Euronext may seem like numerous nails being hammered into the London Stock Exchange’s coffin. However, plans to create an alternative trade reporting venue through Project Boat and a rival trading platform in Project Turquoise could well be final the straw.
Amid a flurry of reports over proposed plans by consortias to shift liquidity from Europe's premier stock exchanges in what amounts to a ‘liquidity grab’ (Project Turquoise) and use an alternative for their trade and transaction reporting (Project Boat), are they real and can the objectives be achieved even if technology today is no longer the obstacle it was two decades ago? Could the boat be ‘flawed’ and sink soon after launch?
While the investment banks are clearly keen to see an alternative to Europe’s leading stock exchanges and the LSE in particular, where the bulk of international trading of liquid stocks are executed, doubts arise over the reality behind what has surfaced. “It could just be a play,” says Glenn Bedwin, head of research, Europe at Thomson Financial. “And, it could be that the investment banks are building a competitor in order to ensure that they can exert some leverage over the exchanges and drive down their tariffs.”
Mr Bedwin added: “While I personally don’t subscribe to that view [forcing price cuts]. The investment banks have shown a great deal of commitment to Boat and I think they will display a similar level of commitment to Turquoise. Consequently, it would be very dangerous for the exchanges to assume that this is just a mechanism to drive down costs.”
That said, historically liquidity has been “sticky” and attempts like Easdaq recently in Europe and the Arizona Stock Exchange’s failure in 1991 illustrate the point.
Herbie Skeete, founder of MondoVisione and organiser of the ‘Exchange Forum’ in London, contended that: “Boat should work…but as regards Turquoise, I’m doubtful whether it’s real. Project Turquoise might just be an attempt by the investment banks to force the exchanges to cut their prices."
Indeed, many of the banks and firms behind the projects might just be feeling a bit smug just now given the LSE’s reaction to these cunning plans, and similarly with Euronext. After five years of defending themselves from takeover bids, the LSE might be “strategising finally” as Gary Wright, chairman of BISS Research notes. Not before time.
New initatives
Following news that the Boat consortium had selected Cinnober Financial Technology, a fast growing Swedish firm, as technology provider and Markit Group Limited as business partner, the LSE hit back with new tariff initiatives.
For example, effective 1 April, ‘SETS Internaliser’ – a lower tariff for self executions – will be introduced. This is at a reduced ‘ad valorem’ rate of 0.1 basis point (an 87.5 per cent discount from the current ad valorem rate of 0.8 basis points).
From 1 November, a new European Trade Reporting service will be introduced to replace the current UK, AIM and EU services, a value-based discount scheme effectively reducing the current ad valorem rate by 80 per cent. The upshot: the maximum charge reduces from £2.75 (€4) to 50p, discounted to a possible 6p maximum per trade.
The so-called ‘Boat project’ comprises a consortium of nine investment banks - from ABN Amro to UBS who claim they are “creating a utility that will generate a new paradigm” across European capital markets.
And, just as with the consortium of seven investment banks behind Turquoise – four US, two Swiss and one German - can the members really hold together given that are competing head on with each other in the markets day in, day out?
Peter Bennett, principal, Exchanges & Market Data, HCL Technologies, thinks Turquoise could have “more substance” and pose a far greater threat than Boat since the investment banks have “locked in liquidity”. But he doesn’t discount the distinct possibility of “multiple” Turquoises. Not all will succeed.
The market might well fragment in the near term in pursuit of a “liquidity grab” in Europe, with price discovery having to be re-aggregated to enable “best execution” under MiFID to occur. Will the regulators step in with a mandate?
Following the selected technology platform and service provider for the Boat service, February saw the issue of draft API specification for the Boat operating platform, while March sees the issue of ‘Boat Contributor Agreement’ and publication of service tariff.
Start of ‘conformance’ testing and market vendor testing is scheduled for August. After full end-to-end testing later this year in September, the ‘live’ service begins in November.
While clearly Boat was initiated to help reduce market participants’ costs by providing the pre- and post-trade reporting facilities required of investment firms - buy-side and sellside - as a result of the European MiFID, and says it will provide services to European equity dealers by collecting, validating, storing, managing and distributing the requisite quote and trade report data over a real-time platform that will enable them to meet regulatory requirements, can it work?
Boat plans to provide access to this database via market data vendors like Reuters and Bloomberg. The claim is that their platform will be open to all market participants in order to help them achieve MiFID compliance in pre- and post-trade reporting.
People familiar with the situation have voiced doubts privately about Boat. For instance, it is queried whether nine investment banks constitutes a critical mass yet? Some banks appear a little resistance, as there are a sufficient number of players out there in the market at least in the near term.
Then there is the question of whether the data being contributed by potential contributing banks will be exclusive via Boat or not. Exclusivity might well put potential members resistant to joining. Whatever else, data will become a messy but vitally important business going forward after November, as will “market led solutions”, according to Dr Anthony Kirby at Accenture.
