February 3, 2016

Aquis Exchange, a European equity trading platform led by industry veteran Alasdair Haynes, will attempt to boost liquidity by limiting the way high-frequency trading firms use the platform.

Aquis, launched by Haynes in November 2013, is to split its membership into two categories: those that trade on behalf of clients, such as investment banks and brokers; and those that employ proprietary trading strategies, such as high-frequency trading firms.

From February 8, Aquis will change its rulebook so that those in the latter category will only be able to post passive orders, which are typically placed by market-makers to populate an order book and provide liquidity. Market-makers are rewarded by capturing the spread between the buy and sell prices.

The changes are designed to prevent HFT firms from pursuing more aggressive strategies. One such strategy is latency arbitrage, which relies on the use of technological expertise to receive data and execute orders fractions of seconds faster than others and exploit price differences across markets.

Exchanges do not usually discriminate in this way and rely on a diverse user base that comprises a number of different strategies, including HFTs, banks, brokers and others, to help create a liquid order book.

What Aquis is proposing is more typical of dark pools – off-exchange venues that are more lightly regulated than exchanges and can be more discriminatory in the way they manage access. A number of dark pools put their users into various categories based on how aggressively they trade.

Haynes said Aquis had “not built the market share we anticipated” and added the exchange wanted to bring “dark pool-style characteristics to a lit order book”.

He admitted it was a controversial move and said the immediate impact would likely be a fall in volumes, but “in return, we will get a market that is very advantageous for the long-term investor”.

Other exchanges have attempted to deter the more aggressive types of high-frequency trading, which has come to account for between 30 %and 40% of activity on European exchanges, according to recent research by the European Securities and Markets Authority.

In the US, IEX Group, the equity trading platform at the centre of Michael Lewis’s 2014 book Flash Boys, deploys a speed bump to slow down incoming orders in a bid to defeat the latency arbitrage strategies employed by some HFTs.

Haynes said Aquis had also looked at deploying a speed bump – and received regulatory approval to do so – but said it would have required too much disruption to brokers’ trading algorithms.

Aquis was one of the first the markets to use a subscription-based pricing tariff. However, it has struggled to build volume, with only 17 members and accounting for less than 1% of the overall European equity market.

The Warsaw Stock Exchange holds a 30% strategic stake in Aquis, with the remainder held by employees and high-net-worth individuals – including former Barclays executive Rich Ricci.

Haynes said that he hoped the changes would help Aquis build a market share of between 1% and 2% over the next six months.

Tim Cave