A Buy-side Trader’s Take on the Exchange Consolidation


Paul Squires, Head of Trading, AXA Investment Managers opens up about the relationship between the buy-side and exchanges, and the perceived effects of recent consolidation among exchanges.
From Trading Desk to Trading Floor
We trade on an exchange in the name of a broker, which means there is a buffer between the exchange and the buy-side. The interaction we have with the exchanges and MTF’s works much better now. The MTF’s have done a good job engaging with the buy-side over the past few years, which makes a lot of sense when you think of the evolving landscape of market structure. Historically, buy-side firms and exchanges were never quite sure if they needed to pay much attention to each other; however, there is a much more collaborative dialogue now. Most buy-side desks have mixed feelings about some of the bigger exchanges, in much the same way that some of the brokers have mixed feelings about the positioning of exchanges. On the up-side, there is a sort of national, utility element to the exchanges. For things like index funds, primary exchanges own the end of day official pricing.
Before MiFID, the primary  exchanges were responsible for more of the trade and transaction reporting and it was easier to interpret that data compared with the  fragmentation of trade reporting following the first MiFID installment. On the buy-side, we have this simplistic view that it is positive for reporting to be centralised through the primary exchanges because having liquidity in a single venue is something we see as beneficial. Also, the level of monitoring around the primary exchanges is higher than around the MTF’s, and therefore, things like governance and robustness tend to be greater. Generally speaking, we see the primary exchange as a kind of trustworthy elder statesmen in the world of market structure. Where I think the challenges around the exchanges lie are that innovation can be bogged down by their hierarchy and organizational structure, and therefore, cannot compete quite as dynamically as some of the MTF’s, which clearly have much lighter infrastructure considerations. It is no surprise that some of the primary exchanges have lost market share to the MTF’s, who have been nimble, technology focused and reactive in the face of a changing environment.
Exchange Consolidation
We find it quite fascinating to see what will happen. Given the rate of market expansion, globalization and regulatory changes – all of which lends itself to consolidation – it was an inevitability. Exchanges have to be forward thinking about what their long term roles will be and although there are different aspects to this, what we tend to focus on is cash equities only. When people think of the Toronto or London exchanges merging, they think it is kind of interesting. Deutsche Boerse and NYSE Euronext, on the other hand, is fairly mind-blowing. In a wider context, the really interesting developments for us, the market participants, are for exchanges to look into other asset classes and areas of activity to secure a revenue stream for the future. The real impetus is not from cash equities; it is very much about clearing, OTC, potentially, fixed income markets and looking at what they can do in more commercial areas.
Net Gain/Loss from Exchange Mergers
We would hope to see technical enhancements at the exchanges. By applying a rule of best practices, the things that work well for the Toronto Stock Exchange or the London Stock Exchange could be transported to the other exchange, as with Deutsche Boerse and NYSE Euronext. The technical platforms and order book layout are quite relevant, so we would hope to see some enhancement in that area. Nonetheless, I would not necessarily promote a uniform market layout or order book structure, as I do not think we need that in every single exchange we trade on. To some extent, the more that order books’ structures align, the more it helps traders who are trading multiple markets. We can  pre-constrain a lot of unique exchange rules in our systems, but there are segments where human intelligence and manual control of the various elements are vital. In this respect, we would see any alignment of market practices as a fairly positive development.
The obvious potential negative outcome of the mergers is in returning to situations where the exchanges have too much of a monopolistic position and can potentially raise costs without the market having any ability to challenge it. If the MTF’s or exchanges raise their costs, we do not necessarily see that on the buy-side because of the buffer that the broker provides. There is a fairly high margin in the commission rates we pay our brokers and they cover their costs of trading our orders on the venues, and those venue transaction prices would have to increase exponentially for it to become a direct factor for us. Of course, it does eat away at margins for the brokers, and it may come to a point where they need to pass those costs on. The buy-side is somewhat safeguarded from rising venue costs, but not completely.

Exchange Mergers and the Buy-side IT Team
Adapting to the merged venues would not involve too much IT work because our connectivity is between our OMS and our brokers and the connectivity between brokers and venues is not something our IT team would need to be concerned about. Our concern would be for some of the static data elements that may need to be updated, e.g. lot sizes or account details in some of the emerging Asian markets.
At the recent EMEA Trading Conference, organized by FPL, there was a good session on transaction cost analysis and whether, with the increase in algorithmic trading and smart order routing, people should be doing venue analysis. I think reverse engineering opportunity costs by comparing certain venues is something that will start to feed through from the more advanced quantitative trading desks. The conclusion for most buy-side desks was to make sure your brokers are accessing the multiple ranges of venues in an appropriate manner and to make sure their smart order routers are working in a smart way. On the other hand, if you split your order up into multiple directions, which is currently the system in Europe, it is difficult to derive quality analysis. This is a facet that we will certainly be keen to monitor, even if on a less than 100% granular level.
Lastly, I should mention that we have had a few outages on exchanges. Exchanges have talked about the race to latency, sponsored access and where their servers are located. While these are all timely issues, and though there has been a concerted focus on technology and innovation, there is a slight concern in the back of our minds that too many shortcuts might be taken at the expense of stability. For long only, institutional investing desks like ours, having your primary exchange go down for half a day exceeds our concern for gaining or saving a millisecond of latency. What we do care about is technical stability at the primary exchanges because they still have a lot of market share and a very significant role to play.
BATS Europe Chief Operating Officer, Paul O’Donnell, discusses what the recent acquisition of Chi-X Europe means for their members.
What are the technical similarities and differences between the two venues trading systems? – or – where are there apparent synergies between both platforms and which technical areas will require some retooling?
Given the multiple synergies between BATS Europe and Chi-X Europe (shareholders, culture and personnel, data centre needs, clearing and regulatory viewpoints), a transaction made great business sense. Currently the BATS Europe platform runs on proprietary technology, whereas the Chi-X Europe platform runs on a combination of Instinet and proprietary technology. Our vision for integrating the two organisations includes migrating Chi-X Europe’s lit and dark books to the BATS Europe platform and rationalising infrastructure and connectivity.
How does the acquisition of Chi-X Europe expand BATS’ offerings for its existing members both in Europe and in the US?
We intend to continue operating Chi-X Europe’s lit book alongside the BATS Europe lit book, which will allow us to offer multiple pricing points and functionality differentiation between the two books, and we’re considering how we could consolidate two market data feeds and offer a real-time consolidated data feed at a low cost. Chi-X Europe also operates a dark book, as does BATS Europe, and we’re currently discussing the possibilities for differentiating two dark books. Once the integration is complete, our offering of multiple books, consolidated market data, and the rationalisation of technology environments and infrastructures, will be extremely competitive and ultimately should lower our participants’ cost of doing business. Our immediate focus with this transaction is the European equities market, but we are always looking for opportunities to leverage technology and resources that could add value for our customers in the U.S. and Europe.