Best Execution: New Beginnings

January 26, 2014

Alasdair Haynes is the founder and CEO of Aquis Exchange. He is the former CEO of Chi-X Europe and was responsible for growing the business into Europe’s largest equities trading platform and into profitability before its sale in late 2011. Prior to that, Haynes spent 11 years heading up ITG’s international business, pioneering the introduction of electronic trading and crossing into the European and Asian marketplaces. He began his 30 plus-year career in the City with Morgan Grenfell and has held senior positions at a number of investment banks including HSBC and UBS.

There are many MTFs on the market so what was the driver behind Aquis Exchange?

When Chi–X Europe was sold to BATs in 2012, I wanted to stay in the industry but had to keep out of the market for a certain period of time. However, in your life you may have a handful of moments where you have an epiphany and mine came when I was buying my son a mobile phone. I looked at the subscription-based pricing model and the impact it has on behaviour. If you are a small or large business or retail customer, there is a price band that suits your needs and I thought why this couldn’t be applied to financial services.

How have you applied this to Aquis Exchange?

If you look at the exchanges in Europe, the fees charged are a percentage of the value of trades, which means their cost base is not linked to revenue streams. They give the biggest discounts to the biggest users. Many of the MTFs are based on a maker-taker pricing model which charges users for orders that remove liquidity from an order book, while offering rebates for orders that add liquidity. What we have tried to do is operate like a telecoms company in that revenues are directly related to the process costs of our business. Clients have their clearing, settlement, execution and data all in one package like you would do for your phone subscription. Users are charged according to the message traffic they generate, rather than a percentage of the value of each stock that they trade. There are different pricing bands to accommodate varying degrees of activity. For example, there is a very low usage band for small firms, which are traditionally disadvantaged by the pricing structure of the incumbent exchanges. At the other end is the top category where usage is unlimited. We believe our model is fair, inclusive, simple and transparent. I also think this is a more efficient way to run a company because we can predict the number of users and their subscription type for the following year, and from that, allocate and align our costs and revenues accordingly.

What will the charges be?

Starting in the middle of January 2014, we will charge £2,000 per month for trading firms that have a small message requirement per day, and £10,000 ($16,200) per month for unlimited messages (subject to a fair usage policy), which reduces marginal costs to a bare minimum. We do not plan to charge for the data for at least two years. When we do though it will be materially lower than the incumbent exchanges charge.

How did you build the platform when everyone was working remotely?

It was a classic technology story of people working from their garden shed or out of their home to build a business. There are 30 people in the company and over half of us are from Chi–X Europe, so we had a proven team of people who had already worked together on different projects. We met once a week in a Starbucks in London but the rest of the time was spent working separately. One of our main advantages was that we didn’t have to rebuild a platform or use legacy systems but were able to start from scratch and build a new comprehensive integrated multi-dealer platform. I think that some of the main benefits that our new platform brings latency is significantly lower than many of the existing exchanges and the architecture is highly scalable, which allows not only high numbers of simultaneous trading connections but also high transaction capacity.

Do you think the market needs another exchange though?

Currently about 95% of all equity trading is done either on the national exchanges or BATS Chi–X and I think there is space for one or even two more major players. In fact, history has shown that markets don’t like a duopoly and we thought it was the right time for a third player. The European equity market has been through a difficult time and we are finally starting to see growth coming back in this space. Our aim is not just to provide fresh competition to the MTFs and exchanges but to change the pricing mechanisms of the industry and to lower the trading costs maintained by the existing duopoly.

Where did you get your backing?

We did not want to sell a share of the firm to a user because of the conflicts of interest. We also did not want the consortium structure as it is not very efficient. So the employees own 25% of the company while the Warsaw Stock Exchange has a 30% strategic stake. They viewed it is as a way of offering Polish securities to the West and vice versa. The remaining 45% is owned by high-networth individuals. We are giving ourselves a good 18 months to gain traction. We will know in this time whether the market wants subscription pricing or not. We have about a dozen plus users but are targeting a total of 42 for this year and are hopeful we can get them over the line. We announced our creation in October 2012, launched in November 2013 and have so far been delighted with the results.

What are your future plans?

It is very early days but one of our aims is to sell our technology as a piece of kit or, in effect, an exchange in a box. We can trade any asset class, plus also do the market surveillance and provide the data in a faster and cheaper way. We can also provide a turnkey solution to organised trading facilities that are expected to be launched after MiFID II is finalised. In terms of trading, we launched with clients performing test trades in three European markets, – France, Netherlands and the UK. The plan is to widen the number of stocks available to 1,000 plus across 14 markets.