Liquid assets

With all the media hoopla (including my own verbal diarrhoea) surrounding the announcement of multilateral trading facilities (MTFs) like Project Turquoise emerging in response to MiFID, it is easy to get carried away with the newness of it all. After all, it gives us hacks something to write about.

'MTF backed by investment banks challenges exchange monopoly' is a headline few hardened hacks would find difficult to ignore. But perhaps I have been a little premature in espousing the virtues of these alternative trading venues and the competitive threat they pose to the exchanges.

The reason I say that is because this morning I listened intently as market participants at a breakfast briefing hosted by Interactive Data, commented on whether they believed these new execution venues would be successful in attracting liquidity. Liquidity is after all the end game, and if these alternative execution venues don't attract their lion's share of it, then they will be remembered as those that tried to topple the 'emperor' but failed in their 'coup' attempt.

"If they can slash costs in a monopoly industry, then they [MTFs] will succeed," says
Dr Paul Lynch, managing partner, PE Lynch, a UK-based algorithmic trading specialist. However, Lynch believes it is unlikely these new platforms will attract 50% of the London Stock Exchange's liquidity within the first three months. It all boils down to whether these MTFs create better market spreads, he says.

The recently announced MTF projects are still unknown quantities and only time will tell what impact they will have in terms of fragmenting liquidity within Europe. Jon Carp, head, electronic brokerage and execution sales, Europe, Crédit Agricole Cheuvreux International Ltd, said he had seriously considered whether Cheuvreux's deal flow justified setting up an MTF or whether it should partner with a consortium of investment banks like Project Turquoise? At the end of the day, it is a business decision a number of brokerages must be mulling over with MiFID looming on the horizon.

Nevertheless, Carp believes that if the LSE were to drastically slash costs in the face of heightened competition, that may encourage some sell-side firms to stay put. "If the cost of trading comes down, it will be more attractive for the banks to say they don't have to build Project Turquoise," he says. But now that the investment banks have partially dipped their toes in the water and found that the temperature is too their liking, will they want to totally submerge themselves in the new competitive landscape that beckons or will they need to be thrown a life raft?

Arguably, it's a win-win situation for the investment banks regardless of whether Project Turquoise gets off the ground or not. Even if they don't attract liquidity, one thing they will have succeeded in doing is forcing the exchanges to reduce costs. Costs will inevitably come down. But if the investment banks do succeed, and surely we can expect to see more MTF announcements on the not too distant horizon, then what impact will all these venues have on already ballooning market data volumes?

According to Octavio Marenzi, CEO, Celent, who chaired the Interactive Data debate, MiFID says post-trade data can be published on web sites as long as it is "machine readable". 'Does that mean that there will be 60 different data sources?' he asked the esteemed panel. Danny Moore, COO, Wombat Financial Software, hinted that there could be real problems with 'symbology' if post-trade data can be published anywhere. "Symbology is a huge issue," he said. "It would be easier if everyone used the same symbology but somebody has to do the conversion. We can't do that as a vendor so it is pushed back onto the clients."