September 3, 2013

London-based, pan-European multilateral trading facility (MTF) Aquis Exchange is embarking on a new approach to its pricing model and capital formation as it awaits final approval from the UK’s Financial Conduct Authority (FCA).

Amid a whirlwind of global exchange consolidation, smaller entrants are quietly gearing up with some unexpected alliances in Europe to meet MiFID II’s best execution mandates.

One of them, Aquis Exchange, comes with a notable pedigree. Alasdair Haynes, its founder and CEO, brought much of his IT staff with him after his previous project, Chi-X Europe, was bought by Bats Global Markets about 18 months ago. His goal now is to break the prevailing duopoly in most European markets that he helped to create.

“That road is scattered with bodies, because many European MTFs tried to cater to a specific market, such as the Nordics, or to either retail or high-frequency traders, which led them to be abandoned outright or, in cases such as Burgundy or Turquoise, bought by larger players,” Haynes says. “We were successful at Chi-X because we were the first to really treat Europe as a single market on a technological level. But duopolies [of which, in Europe, Bats’ Chi-X is often one half] will frequently act in the same way as a monopoly. So to achieve real competition, I resolved that we need at least a third player involved.”

Never a ‘Me, Too’ MTF

From day one, Aquis would both operate and be funded differently than MTFs past, to reflect Haynes’ dual priorities—to be “disruptive and non-conflicting.” The CEO’s time off after the Bats deal led him to examine growing academic literature about the telecommunications industry, comparing subscription or tiered pricing—e.g. of minutes or text messages—to per-use (or per-trade) fees that, in the exchange environment, are still the standard. An idea was born.

“We never wanted this to be a ‘me, too’ product,” he explains. “A subscription model, with unlimited messaging capacity for some users, or where smaller users receive a limited amount with certain cross-connects and other services, would utterly change the exchange business. No limit is obviously incredibly attractive for certain players, while others who don’t need that aren’t subsidizing the bigger firms by paying the same per-trade price as they do now. The key is that it recognizes the importance of a market’s ecology, and appeals to every user. A model that doesn’t cater to that variety won’t succeed.”

Those fees, to start with, will be £10,000 ($15,800) per month at the top, or £2,000 ($3,100) for 25,000 daily messages. Assuming sufficient liquidity is attracted over the next three years, the unlimited monthly rate would gradually rise to maximum of £50,000 ($77,900), after which it will be fixed for two years and only increase with inflation.

Considering the lower introductory fees, and the cost of completely re-architecting an IT platform, Aquis also needed investors. Haynes says he wanted to take a unique approach to funding the project, by seeking capital from a single strategic partner; a separate group of ultra–high-net-worth individuals who know financial services, reportedly including former

Barclays’ CEO Bob Diamond and head of investment banking, Rich Ricci—for legal reasons, Haynes would neither confirm nor deny their involvement; and finally, the Aquis staff.

The strategic partner, Warsaw Stock Exchange (WSE), was sitting on excess capital and looking to diversify its international exposure. Its 30 percent stake represents a perfect match, according to Haynes.

“By contrast to when we launched Chi-X, I think there is a greater sense today of conflict, when the owners of a business also happen to be its users. So we wanted to avoid the traditional consortium approach, and instead sought someone who would be neither customer nor competitor, to complement our own direct investment [of 25 percent] that obviously really encourages us to succeed,” Haynes says. As part of the WSE deal, connectivity will be built allowing clients of both venues to gain direct access to the other.

‘Good Kit’

Though a new venue, Aquis will also aim to look more like its global counterparts in the way it monetizes its technology. “We have an exceptionally good piece of kit, I think, and you need that to be in this game,” Haynes says. “But over time, it’s more about how you use it—so for us, that has to do with allowing multiple messaging types, contingent order types, and the ability to rapidly move beyond equities to other asset classes like equity options if the demand is suddenly there.”

He says he also sees space for software licensing. One startup in South Africa has already done a deal with Aquis to provision a matching engine and a cross-connect through its presence at the Equinix LD4 datacenter outside of London. “We see the market for exchange-in-a-box solutions as growing, and you can obviously go to a bigger operator, like NYSE Technologies, Nasdaq, or Millenium IT to get those—but comparatively speaking, you’ll pay a huge premium,” he says.

Bottom Line

  • The decisive aspect of the Aquis proposition is the pricing model, and its applicability to the appetites of the current environment, including oversight. “Just as is done with telecoms, we’re going to monitor very closely for fair usage in terms of quote-taking versus trades,” Haynes says. “But we think regulators should like the model in that we’ve taken great pains to ensure it’s clear, and it’s fair.”
  • As for making waves, Haynes says trading should be only the first piece under an umbrella of subscription-based services. “I would like to see a time when, as a customer, you can settle, clear, execute, and have the market data all provided for a single fee per month, rather than having those costs differentiated. European turnover is still only a quarter of that in the US, and coming closer to that kind of offering is the only way to inspire true growth. If we can get there, that growth will be exponential,” he says. That may not yet be cost-feasible. But the notion underlying it has so far proven a worthy bet.

Tim Bourgaize Murray