October 14, 2013

Hirander Misra is starting a new exchange. So is Alasdair Haynes. Neither of those plans should be that surprising to many people, since both played important roles in the meteoric rise and sustained popularity of Chi-X Europe, the first venue designed to take advantage of the sweeping changes brought in by MiFID. Automated Trader gets the low-down on the new Aquis and GMEX exchanges.

Initially, a pan-European MTF, Chi-X Europe immediately grabbed market share from established players and went on to become a dominant force in European equity trading. Scooped up by its rival BATS (which itself is now due to merge with Direct Edge), Chi-X Europe has since become a regulated market.

Hirander was instrumental in developing the company. He was its first full-time employee, and served as chief operating officer. Alasdair, after running ITG Europe, was brought in as CEO at the start of 2010 after a period of intense management turnover.

But both left the company to stake out new territory. So what are these two exchange leaders up to? They’re going after very different markets, and in very different ways. Both say they have concepts that will shake up their respective sectors. One aims to overhaul the cost model, the other is trying to innovate on the product side. Automated Trader spoke to both about their new ventures.

Aquis: A leaf out of the telecom sector’s playbook

Is it possible for a firm to entirely change the model that exchange fees are based on? Alasdair Haynes thinks so.

AT: How difficult is it to launch an exchange right now?

I would suggest to anybody in the future that it’s not for the faint-hearted. The first thing, if you think you have a good idea, is you’ve to find a good way to fund it. I was adamant on day one that I wanted this to be non-conflicted, making it very different to other approaches from MTFs that have tended to be consortiums, often customer-led consortiums. I wanted something that did not have the customers involved. There is ultimately going to be a conflict somewhere down the road if the customers own your business and you’re trying to build a very different model.

We’ve done this deal with Warsaw Stock Exchange — they’re not a competitor, they’re not a customer, but they clearly understand the exchange business. And then the rest of the funding has been done by high net worth individuals.

AT: Everyone claims to be new and different. Why is Aquis?

If we work, and obviously we believe it will, we think it will change the industry forever.

I knew when I left Chi-X that I wanted to stay in this space. I had some ideas of things we wanted to do, and I knew that we couldn’t just start an MTF. A me-too was never going to work. And I think the trouble with many of these MTFs is being a me-too model. We were fortunate in that we managed to get a group of people with a proven track record, who have built, worked, and operated a successful trading platform, and who, with that track record, have been able to regroup and build a very advanced piece of technology.

Out of the hundreds of MTFs that have come to Europe the past few years, only a handful of them have truly succeeded and that is because most of them have very much been me-too models. This is completely different.

We’re going to introduce a telecom-style utility model to the industry. And in other places, where this has happened and a subscription price has been introduced, you’ve seen a radical change to the industry. I unfortunately – and fortunately – am old enough to remember the way that British Telecom used to operate. My parents used to regularly shout at me get off the phone because it was costing too much money. And I look at my children now and I don’t really care how long they’re on the phone because it’s an all-you-can-eat model. It’s very efficient.

Since subscription packages were introduced, you’ve seen exponential growth in texts, exponential growth in the use of phone calls, exponential growth in downloading. And that is the same almost everywhere I’ve seen a subscription price introduced.

People’s criticism of the equities market, particularly in Europe versus the United States, is we have a market that does about 25% of the turnover of that of the US, and yet we have the same GDP in Europe and a population that is actually slightly larger. Part of the answer is high costs and that the way to address this is with a new model. We think there isn’t enough competition.

AT: How did the idea come about?

To be honest, it was when I was buying a phone for my 13-year-old son. That’s when the penny dropped. I looked at the packages that were being offered in the particular shop and just went, ‘Hang on a second. This is what an exchange is doing’. When I was operating Chi-X, I looked at how our costs were dependent upon message traffic in the same way that telephone costs are dependent upon the number of phone calls and the number of texts, the number of downloads. I don’t really care what the underlying value of the stock is. And yet, exchanges today in Europe charge based on the value. You pay London Stock Exchange more for trading a share of Glaxo than you do for Vodafone, simply because one is at 17 pounds something and the other is at two pounds. That doesn’t really make sense.

My costs operating as an exchange are down to message traffic, so why do we not charge based on message traffic, and why do we not do what the telecoms companies have done? If you’re a small user and you’re not using much, you shouldn’t have to pay as much. And that’s why I can go and buy my son a phone and where he has limited texts, limited downloads, a limited number of calls. On the other hand, I, as a heavy user of the phone, will have unlimited texts, unlimited downloads, unlimited calls. In other words I pay more bandwidth than he does, and therefore that is fair, transparent and open. And I think we can have the same form of impact in the exchange and the cash-equities space as we’ve seen in telecoms.

AT: A lot of venues have specific target groups. You seem to hope to attract different users based purely on your model.

The national exchanges naturally have liquidity from all areas. Most of the MTFs have been set up specifically for a certain group, for example, the retail market or the high frequency market… We’re coming into this market saying, ‘Actually it’s open to all.’

Our pricing schedule is very simple. The start-up is 25 thousand messages a day. You pay £2,000 pounds a month. If you want more than 25 thousand messages a day you pay £10,000 a month and that’s your cost however much you use – there is no cap. You can carry on trading as much as you like. That is a substantial saving. As we build liquidity, we’ve told people we would see additional price tiers coming in. At £50,000 we will cap it.