February 22, 2017

A London-based stock exchange that was on the ropes a year ago is getting a lifeline from algorithmic traders drawn to its efforts to blunt the advantages of raw speed.

Though still small, Aquis Exchange Ltd. has seen its share of European trading more than double in the past year. Part of the reason is firms like XTX Markets Ltd., an algorithmic-trader that uses machine learning, which became a member of the platform this year.

Stock markets are stitched together these days by a web of underground cables and microwave radio links, typically giving traders with the fastest connections an edge. That race is of little use for a market maker on Aquis, however.

Companies like XTX say they like the stock exchange’s unusual set of rules, which negate the advantages of high-speed technology, highlighting that not every computerized trader is reliant on being the quickest.

“No matter how many microwave towers you build, it doesn’t give you much of an advantage on Aquis,” said Alex Gerko, co-chief executive officer at XTX Markets. “We’re quite optimistic about their future. Their model differentiates them quite a lot.”

The idea is to reduce latency arbitrage, where a trader uses faster data connections to take advantage of traders posting out-of-date prices. The exchange discourages such practices like this: Proprietary traders are only allowed to place passive bids and offers. That means they have to wait for a trade to occur — they can’t act on anyone else’s orders.

Brokers acting on behalf of clients like pension funds or asset managers don’t face those restrictions. In theory, this could prevent investors (and market makers) from getting exploited by a company with faster technology. XTX says it allows them to quote better prices.

More Liquidity

Gerko said a large percentage of European stock trading probably consists of slow market makers being picked off by fast market makers. Aquis doesn’t have that type of trading, so it has to attract other kinds of liquidity, he said. Other trading platforms say they have tried to achieve the same result using technology — like New York’s IEX Group Inc. — but Aquis is unusual because it uses rules for that purpose.

“We end up in a situation where latency arbitrage isn’t something we have to worry about,” Gerko said of Aquis. “We are comfortable providing more liquidity there.”

Since market makers aren’t trading with each other, Aquis’s trading volumes may be persistently lower than other stock exchanges. That may not matter so much for its bottom line, though. It gets paid on a subscription basis and so may not be as dependent on market share as some platforms.

XTX isn’t the only trading company that likes the rule. In March, Virtu Financial Inc. said it had boosted the liquidity it provides there. Aquis founder Alasdair Haynes says the company has been signing banks up on the platform as well.

“We have lots of people coming on board now,” Haynes said. “It’s a taken a while, but we’ve got some momentum behind us.”

It could mark a sharp turnaround for Aquis. The company posted operating losses of more than 4 million pounds ($5 million) in both 2015 and 2014, according to Companies House filings. Haynes says his company will also get a tailwind from incoming MiFID II regulations that require asset managers to prove they’re not getting overcharged for their trades, a practice known as best execution.

“I am extremely confident that we’re going to make it now,” Haynes said. “Did I worry? Absolutely. This is has been a tougher road than I ever imagined.”

The platform accounts for about 1.4 percent of European stock trading this month on public markets, which excludes dark pools. That’s up from as little as about 0.3 percent a year ago. It still has to contend with the likes of Bats Global Markets Inc., whose European unit has about 19 percent share of public trading this month and 22 percent including dark trading, according to Bats data.

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