September 17, 2013

There’s not long to go before the industry finds out if Europe’s newest share trading platform, Aquis, will ring in the right changes when it launches in October — or if it will simply fade away like many others before it.

Aquis chief executive Alasdair Haynes seeks to break new ground with a “telecoms style” fee structure based on message traffic rather than a percentage of the value of each stock traded or ad valorum, as exchanges currently charge.

The tariff will be split into two bands, one for very low usage to attract smaller dealers, and an upper band giving larger ones unlimited use. It will be a hybrid market with order-driven and quote-driven books, offering trading in shares from 15 European countries.

Haynes, a 30-year veteran of the exchanges industry, a simple price spark more turnover so that Aquis grows the overall market and not simply steal volume from others.

“We are trying to grow the underlying market and we have come up with a model that will encourage more trading,” Haynes said.

He hopes the fee structure creates a diverse trading “eco system” that includes not just the big players but also much smaller players as the price barrier to entry will be far lower.

EU rules known as Mifid introduced in 2007 sparked a flurry of new entrants into share trading but very few became profitable and withdrew. By now 90 percent of share trading in each country is on just two exchanges – the national bourse and BATS-Chi-X.

Aquis has set itself the ambitious target of becoming the third player in each national market, pitting Haynes against BATS-Chi-X. Haynes led Chi-X to profitability before it was taken over by BATS, triggering his departure and latest attempt at reinventing himself.

“We want to be the third mainstream player. We are not setting out to be a niche player,” Haynes said.

Trading volumes remain lackluster with still no major pick up in listings or M&A activity as growth takes time to return. “Our model is not based on a massive economic recovery. We can be successful in the current climate,” Haynes said.

Brian Taylor, a consultant, recalls how he advised Syntegra in 1990s to design and sell network services for settlement house Crest, based on a telecoms model he said proved to be a huge success because it was combined with world class technology.

“The proposed telecoms pricing at Aquis is not as advanced as the Syntegra model so maybe there is room to improve,” Taylor said.

The move to set up a new equities platform has sparked some scepticism due to sometimes thin margins for upstarts and as most competitors turn their attention to derivatives trading, clearing or reporting, a sector they hope will grow significantly due to a slew of tougher regulation.

“There is massive goodwill out there towards us from the users. We will have volume from day one,” Haynes said.

Compared with the hundreds if not thousands of staff big exchanges employ, Aquis will have about 28 on the payroll, with over a third who left Chi-X after BATS took it over.

Taylor said there is always room for new entrants in equities if the business plan is right as the market still attracts “super normal” profits, and the market share of incumbents generally still significantly higher than in America or in other industries where new entrant, low-cost providers have emerged.

“However, I think multilateral trading facilities are slowly waking up to the fact that you have to be a full service operator to generate profits,” Taylor said.

But Haynes vows to stay “horizontal”, meaning it won’t use just one clearing house. In the medium term Aquis will focus on cash equities but other asset classes and geographies are likely to follow, Haynes said.

The exchange’s primary data centre will be located at Equinix on the outskirts of London and offer connections via co-location.

Aquis users will be able to clear on the four – soon to be three – clearers that have signed interoperability agreements: LCH.Clearnet, Swiss x-clear, and EMCF and EuroCCP, which are merging.

The project is backed by a group of angel investors and several rich “household names” that include people from property and even a farmer, with some proven heavyweights on the board.

Non-executive directors include Niki Beattie as chairman – she is a former Merrill Lynch head of market infrastructure in Europe – and Mark Spanbroek, currently secretary general of the Futures Industry Association’s European Principal Traders Association and a former director of GETCO in Europe.

The Warsaw stock exchange, eastern Europe’s biggest bourse, said in August it will buy 30 percent of Aquis for $8 million, a sign of how seriously some are taking the new venture.

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Huw Jones