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Finding Blocks – A Case Study – Industry Collaboration in Action

With Robert Barnes, CEO, Turquoise, Jonathan Finney, Head of Systematic Trading EMEAA, Fidelity International, and James Hilton, Co-Head AES Sales EMEA, Credit Suisse
Robert: In an order book environment that naturally leads to small trade sizes, investors that wish to outperform benchmarks are calling for innovation in electronic block trading.
To answer this call and still trade in the presence of anticipated MiFID II double volume caps, one needs a respected and working trading mechanism that can match orders above 100% of the Large In Scale (LIS) threshold determined per stock by ESMA.
Turquoise has a working LIS innovation: Turquoise Block Discovery, which matches undisclosed Block Indications that execute in Turquoise Uncross. Turquoise design reflects active collaboration with the buy-side and sell-side. 1 , 2
Jonathan: With impending MiFID II legislation, Fidelity as a whole has commended much of the innovation that has happened in the markets and been actively engaged on several projects, many from inception. However, as a large institution we also very much err on the side of caution and, when Turquoise approached us about their proposed new venue, we met this with cautious optimism. Our concerns were varied but were mainly focussed on due diligence, risk and control analysis and general policing of participant behaviour. We could definitely see potential in their proposals but we felt there was also a lot of granular detail which needed to be worked through for us to be comfortable as a firm from a best execution perspective.
Therefore, when Turquoise Block Discovery first launched, we were not one of the first initiators but we definitely had a interest in its success and were actively engaged with Turquoise, buy-side peers and sell-side counterparts in the meantime in discussing what we needed to be comfortable with engagement. By understanding how their reputational scoring worked, having increasing comfort in the transparency of their policing mechanisms, and attaining greater understanding of the types, size and quality of trades occurring, as time went on, we felt we were in an increasingly strong position to justify adding Turquoise Block Discovery to our selection of venues via brokers, especially using the conditional order type. I am pleased to say that, though success has been relatively scarce as adoption is still in its early growth phase, the quality of liquidity has scored well across a variety of external metrics.
James: There have undoubtedly been challenges to implementation of this solution. Even before you look at the technology development, you have to spend some time to understand and get comfortable with the model – it’s relatively unique. And clearly, we had to garner feedback from clients to see whether there would actually be a demand for it.
Once we’d established that it would be a viable model, and clients wanted to use it, we invested in the technology development. Luckily for the buy-side, the heavy lifting definitely falls on the sell-side. Supporting the full conditional nature of the service has required some effort, and there are still some key brokers working on that. Because of the model, Credit Suisse offers access to the service on an opt-in basis. So, whilst you have some brokers not offering full functionality, and buy-side having to positively opt-in, invariably it takes time for the momentum to gather. The key to the service is that there’s virtually no opportunity cost. We have been meeting a lot of clients to talk about the service, and explain why this is something we feel is worth supporting and the majority are signing up.
Key metrics
Robert: The metrics that matter include low reversion, large average fill size, and high firm up rates.
Low reversion
The design of Turquoise Uncross innovates with a random timing mechanism which prevents either buyer or seller from determining the instant of execution. This has been the subject of multiple studies by LiquidMetrix, the independent analytics firm that specialises in venue performance metrics and execution quality analysis. They repeated their analysis in October 2015 and, for the third year in a row, spanning before and after the 2014 launch, and again concluded that trades occurring on Turquoise Uncross had a far lower correlation with sharp market movements on primary venues than trades occurring on other continuously matched MTF Dark Pools.3
Large average fill size
Turquoise prioritises orders by size and features innovations that deliver a broker neutral venue that is reversing the electronic trend of shrinking trade size. Turquoise Block Discovery now averages more than €250,000 per trade, and this average is more than twentyfive times larger than the average €10,000 for electronic trades matched by continuous dark order books.
High firm up rates
We have more than a year’s worth of empirical measurements evidencing consistently high firm up rates. These high firm up rates result from a strict timing mechanism and robust automated reputational scoring, which measures the difference between the original block indication and the subsequent firm order.


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