January 24, 2013

We kick off our annual nominations for the 20 market makers to watch in 2014 with a look at Europe’s new Aquis Exchange, which aims to “revolutionise” the exchanges space. Launched in October 2012, with its first trades conducted in November 2013, it is pushing ahead with growing its infant multi-lateral trading (MTF) business, including equity trading, data provision and technology sales. Ruth Hughes Liley reports.

In spite of its pre-launch pretensions, however, growth on the platform may be more evolution than revolution as it grows from its initial 0.03% market share in the CAC40 index and 0.02% in the FTSE100 following the quiet period over Christmas. Aquis opened by offering trading in 165 instruments in the UK, French and Dutch main indices, and added German stocks at the end of January and is aiming for more than 1,200 instruments in 14 European markets, plus a number of international depository receipts.
Haynes has not ruled out a dark book at some future stage. In contrast, well-established rival Turquoise already trades more than 2,800 stocks and exchange-traded funds in 18 European and emerging markets as well as US stocks and depositary receipts.
Aquis is already facing what CEO, Alasdair Haynes, describes as “huge” opposition from incumbent exchanges with one unnamed CEO of a European venue telling him ‘I hope you fail’. The platform’s first growth opportunity has come from the unlikely arena of the European Union, which will effectively ban broker crossing networks under MiFID II, forcing them to re-register as MTFs or go out of business. “It’s a huge opportunity,” says Haynes, who plans to sell technology to them as well as picking up trading volume. “MTF status is not easy to achieve. Setting up an MTF is completely different from running an internal crossing network. You need to provide equal access to all, better surveillance technology, and better matching tools. It’s cheaper and more efficient for banks to outsource. Our system and response times will be competitive, all they have to do is say what they want.” Haynes is expecting Aquis technology—what he calls an “exchange-in-a-box”—to be in demand. In fact, it is the firm’s IT employees who could be said to hold the key to Aquis success. When Chi-X merged with BATS, many of its IT staff were made redundant and later employed by Aquis. Out of a team of 33 at Aquis today, some 17 are former Chi-X Europe employees, many, significantly from the IT team that had developed two exchange systems. For some employees, building the technology for Aquis is the third time they have built a low-latency infrastructure from scratch.
Its proprietary technology (the prototype was built in one employee’s garage) allows for ultra-low latency simultaneous trading connections and has a high transaction capacity. A proprietary protocol allows fast access to markets and reduced bandwidth, although FIX protocol is also built in.
Clients can connect to Aquis Exchange via co-location at the firm’s primary data centre at Equinix in Slough, which offers access to more than 30 markets and 80 venues, or the secondary centre at Interxion’s City of London campus. Because the software is built around message traffic on its system, it can be applied to other asset classes. The team even had one inquiry from an advertising agency wondering whether it could be applied in that sector. Its first real customer is Quote Africa Group which wants to create a network of African listed stock exchanges. Aquis is providing it with a matching engine and surveillance technology. But with Africa representing only 7% of active emerging market equity trading, the sums are small.
However, while Haynes says the “real money” lies in the sale of its software, he says the trading capability of Aquis is the ‘shop window’ for its technology suite and here is where the ‘revolution’ comes in. Haynes wants to break what he sees as exchange duopoly—that although competition came to European exchanges with the Markets in Financial Instruments Directive (MiFID) in 2007, 90% of European equity trading still takes place on two exchanges, the national exchange and MTF BATS Chi-X Europe. Haynes wants Aquis to become the number three venue. “We spotted the duopoly and that is no good for markets. Last year was an ideal time to hire people as firms were cutting costs and it was a great time for change.”
While Aquis is late to the party, Haynes brings with him his experience as CEO of pan-European MTF, Chi-X Europe. Within four years Chi-X Europe was profitable and within five years Haynes had built its share to up to 24% of trading across Europe.
However, at Chi-X Europe, he had the support of parent company Instinet; earlier, working on the Posit crossing engine in the late 1990s, he had the backing of his employer ITG. This time he is going it alone. “Aquis has had all the ups and downs of a start-up and it’s a fairly scary thing,” he admits. “There are around 175 MTFs listed in Europe so the odds are against you. If you were fainthearted you wouldn’t do it. If all we have done in the next 12 months is gain a 2-3% market share I will think we have failed. But if Aquis succeeds, exchanges are going to have to change their model.”
Haynes has spoken to buy-side representatives who he points out are traditionally suspicious of new markets because they see it as adding to fragmentation. Indeed, 50% of the buy side rate finding liquidity their second biggest challenge after regulatory concerns, according to TradeTech’s 2013/14 buy-side report.
Steve Grob, Fidessa’s director of Group Strategy, anticipates that Aquis should be included in the Fidessa Fragmentation Index before the end of Q1 this year. The index calculates how many venues a stock has to trade on to achieve best execution and so is a measure of liquidity across all venues. He says the key to Aquis’s success will be its focus and attracting sufficient varied participants to connect to the venue. “History suggests that focusing on particular areas brings liquidity more easily than trying to attract liquidity across all areas, particularly with limited resources. Volumes on Aquis are modest at the moment, but it is an innovative idea and I think it could be disruptive. I know the team has put a lot of effort into it, but it is a challenge in today’s very complex world to get attention. It will naturally take some time,” says Grob.
Attention will be on Haynes in March when he is speaking at the World Exchange Congress in Qatar on “A case study of a market disrupter”. The confidence that Aquis is ‘disruptive’ is based on the firm’s innovative subscription pricing model, inspired by a trip by Haynes to buy a mobile phone for his teenage son. Garden leave after Chi-X Europe and the prolonged negotiation period before Chi-X Europe merged with BATS allowed him time to research subscription pricing in the telecoms and other industries. So Aquis has launched with a fee structure where clients pay a set monthly tariff for the amount of messages—orders, cancellations or modifications— they generate rather than a percentage of the value of each stock they trade.
There are three price bands: low for smaller-usage firms, an upper band for the largest consumers, capped at £10,000 per month and all messages which post liquidity from designated liquidity providers). Data packages are wrapped up in the monthly fee. “Our costs are directly related to revenue,” says Haynes, “so our future is predictable. This way I have a better idea of how many customers I have and what my income is going to be. Members can predict their costs in advance. It’s a very logical story. It has worked in every other industry where it has been tried. In telecoms, in leisure, media, entertainment. It is very much the way you pay for things now. And every single time it has been introduced, there has been growth in the underlying industry.”
The subscription model is hard to find in other parts of the industry: some clearing companies offer fee-capped charging structures: LCH Clearnet, EuroCCP and EMCF cap fees, with volume above that cleared for free. Volumes below are priced at a tiered discount. In Chile, investors may sign halfyearly or annual agreements with the Santiago Stock Exchange to operate without fees by paying an inflationindexed tariff, but Haynes knows of no other exchange “brave enough or foolish enough” to offer subscription pricing. “International exchanges will not move to a subscription model unless we are successful because it is not in their interests to do so because we are capping the upside. With the share price of stock exchanges at or near their pre-crisis peaks and as public companies, none of the exchanges are able to do that. I believe exchanges should be utilities. Aquis is not an exchange business, we’re a utility.
“Our model allows you to do all your execution, and have all your data under one monthly subscription. If you could do that and include things like settlement fees, the business will explode. This could be rolled out to other asset classes too,” says Haynes. “Many people won’t trade equities today in Europe because huge data and settlement costs make it too expensive. Plus the volume in European markets is a quarter the size of the US market, so there is huge potential.”
Standing to benefit
Those who stand to benefit first are the sell side firms still paying the largest exchange fees. For example in 2012, globally, the industry spent $25.53bn on data, up 2.34% over 2011, according to consultants Burton-Taylor.
Should the subscription model take off, Haynes estimates the industry could save hundreds of millions of pounds. For example, an investment bank paying Aquis’ £10,000 monthly fee would pay £120,000 a year, a fraction of annual trading profits. The fees at Aquis will rise gradually over the next few years in three tranches to a top rate of £50,000, on the assumption enough liquidity is attracted, after which it will rise with inflation.
With electronic order book turnover in EMEA down 24% in 2012, according to the latest figures from the World Federation of Exchanges, attracting liquidity will be key. Aquis opened with 11 customers including three bulge-bracket investment firms, a handful of market-makers, including high frequency firms, and some smaller brokers. Haynes says 40 more customers are in the pipeline, with a programme to connect several each month. One magnet for the larger firms is that with fees capped at the upper end, firms can trade as much as they like after that point, subject to fair usage policy.
Haynes points out: “The more they do, the more the cost per trade comes down. The telecoms industry has fair-use policies and we too are able to monitor transactions to ensure people are not abusing the system.” For example, Aquis’ four order types do not include post-only order types. If firms want to post an order and then cancel it, they have to pay for the cancellation.
While other MTFs have launched with investment and liquidity commitments from the sell-side (Turquoise launched with a consortium of 14 banks) Aquis initial investment has come from a group of wealthy individuals, comprising 45%, and a 30% £5m investment by the Warsaw Stock Exchange, sitting two directors on the Aquis board and eventually allowing clients of both venues to gain access to the other through connected routes. The 75% is worth $12.5m, putting the value of the company at more than $16m. The remainder is owned by Aquis employees.
Some of these employees turned down other job offers, waiting to see whether Aquis Exchange would provide them with an opportunity. This year may determine whether they were right to do so. [1]