Order Routing Key to a Fragmented Europe
With MiFID in place, new venues will test brokers' ability to access liquidity
February 11, 2008
As the Markets in Financial Instruments Directive (MiFID) opens up Europe to multiple pools of liquidity, with quotes displayed on competing exchanges as well as multilateral trading facilities (MTFs), smart-order-routing technology will play an increasingly important role.
With more than 40 alternative trading systems (ATSs) in the U.S. competing with the exchanges, brokers need smart-routing tools to search out best execution for their clients. Now, Europe is likely to see similar fragmentation, and firms that have the technology to reach multiple sources of liquidity cost-effectively will benefit.
"Liquidity is not just on the exchanges or ATSs but within the brokers themselves," said George Andreadis, head of liquidity strategy in London for Credit Suisse Advanced Execution Services. "Brokers can take limit orders that they can't trade immediately and hold them for execution internally."
"By changing your costs you open the way to more activity; stat arb and market-making models become viable in an atmosphere where you are paid to supply liquidity rather than charged for taking liquidity," said Andreadis at the Finexpo conference in London on Jan. 30.
European firms are learning from the U.S., noted Andreadis. The new market structure will require new protocols--such as Fast, or FIX adapted for streaming--fatter pipes to handle the increased data, and improved processing power at the exchanges.
"So far, Chi-X is the only new venue in town and they have done very well based on faster, smarter, cheaper--which is what brokers like ourselves want," explained Andreadis, referring to New York-based Instinet's pan-European ATS, which started trading in April. "When we are processing large numbers of orders for our clients and algorithmically trading them, that's what we need. And we need costs to come down a little."
Credit Suisse fills from 8 percent to 20 percent of its orders on Chi-X for the top 14 stocks it offers, he said, adding, "These are fills inside the spread of the main exchange." The bank achieves price improvement as much as 75 percent of the time, ranging from 2 to 2.5 basis points in smooth markets to 9 points during volatile periods.
"There is liquidity on Chi-X and there will be on other venues," he said. "You cannot afford to ignore it if you want to fulfill your best-execution obligations."
A slew of venues are preparing to enter the market. Nyfix, operator of the Millennium ATS in the U.S., plans to launch the Euro Millennium dark pool this month. Equiduct and EuroECN are expected to roll out this year and Project SmartPool, a joint venture of NYSE Euronext, HSBC and BNP Paribas, is slated to begin executing block trades of European-listed stocks in the second quarter.
"It's very interesting that NYSE Euronext wants to get into the space of dark liquidity, since exchanges are focused on pre-trade and post-trade transparency," said Andreadis. "Now all of a sudden one wants to launch a large-trade dark liquidity venue."
Turquoise, an MTF owned by nine global banks, anticipates launching in September, and he says that other ATSs such as Pipeline Trading Systems are considering a move. Bulge-bracket firms such as Credit Suisse, UBS, Lehman Brothers, Morgan Stanley and Goldman Sachs offer internal crossing networks. Investment Technology Group and Liquidnet each have a small share of the market.
