Plunge into a dark pool in the new era of trading platforms
Project Turquoise is here, and promises to shake up the world of trading. But what does it mean for you?, asks Katie Hope
Within two weeks, Project Turquoise will launch in full. The hotly awaited new trading platform set up by a consortium of nine investment banks, started quietly almost two weeks ago trading just five UK and five German shares. But by 5 September it will be possible to trade over 1,300 stocks across 13 countries on its platform. “So what?,” I hear you ask. And for the average retail contract for difference trader or spread better it could seem like a reasonable question.
But this is history in the making. Over the past century or so, the incumbent stock exchanges have enjoyed a total monopoly. If you wanted to trade then the London Stock Exchange (LSE) was the place to do business. Suddenly, thanks to a European update to the investment banking rules last year (MiFID), your broker has other options – and they are are all cheaper.
Low Charges
Turquoise will charge its members (of which there are an estimated 50 so far, a number that is expected to grow rapidly) 0.35 basis points of the transaction amount for “aggressive orders”, those which reduce liquidity on its platform. Transactions which add liquidity will be rewarded with a credit of 0.15 basis points.
Meanwhile Chi-X, which launched last year, has even lower charges. It requires 0.3 per cent for aggressive orders and it will pay out 0.2 basis points for passive orders.
In comparison, the LSE, which has recently reduced its charges by an estimated 10 per cent in the face of this growing competition, will from September charge aggressive orders between 0.45 and 0.75 basis points, and rebate passive orders at between 0.1 and 0.4 basis points.
Turquoise and Chi-X are not only cheaper, but have ultra-fast trading systems that are suited to the high-volume trading strategies of many hedge funds and other institutional investors.
Many institutions are now using so called “algorithmic” trading, quasi intelligent computer programmes which initiate orders based on information that is received electronically, before human traders are even aware of its existence.
Tiny Shifts
This kind of automatic trading thrives off tiny shifts in data or economic news, sending orders electronically to be matched in a matter of milliseconds.
The new breed of exchanges also offer “dark pools” allowing traders to move large numbers of shares without revealing their hand, or strategy, to the open market. Both the price and the identity of the trader are hidden.
A trader’s intentions – whether buying or selling – are disguised and this reduces the risk of strategies being leaked to the market and trades being either lost or done more expensively.
In comparison, trading on a more traditional exchange, where prices are displayed in a public order book, is akin to playing poker with an open hand. Trade sizes on exchanges are also getting smaller, making it harder for large trades to find matches.
Dark Orders
Turquoise will match dark and visible orders to enable users to obtain price improvement for small orders and trade large orders efficiently while minimising information leakage.
But the incumbent exchanges, are not just sitting back while the new generation sweeps in. SWX Europe, the London-based securities exchange owned by SWX Swiss Exchange, last week announced a 30 per cent cut in trading fees at the same time as Turquoise launched its Swiss equities service.
The LSE, which from September will reduce its trading fees by an estimated 10 per cent, has also unveiled plans for a “dark pool” – offering anonymous trading of large blocks of shares, away from the exchange’s publicly visible order book. The pool, a joint venture with Lehman brothers, is called Baikal after the world’s deepest freshwater lake.
It’s a price war. And the winners will undoubtedly be the users of the exchanges. Competition will only intensify in the coming months as even more new platforms are launched and this is where the eventual benefit for retail spread bet and CFD traders will come. Currently the likes of Chi-X and Project Turquoise are mere minnows compared to the mighty LSE.
Project Tortoise
It’s early days, winning market share will take time and there will certainly be a few hiccups along the way. The numerous delays in the launch of Project Turquoise have already earned it the nickname of Project Tortoise.
Yet by the end of this year, it expects to have won around five per cent of market share – and this it hopes will merely be the start. And in time as more users migrate to the new exchanges and the liquidity increases, the prices will be better.
Better Prices
Spread betting and CFD companies, previously limited to the incumbent exchange, will be able to choose where to hedge their transactions in the underlying market and should be able to get better prices.
This in turn will mean cheaper prices and tighter spreads for the average punter. As one trader said: “It’s a good thing for everyone except LSE shareholders.” And – crucially – the winners will include spread betters and CFD traders.
Analyst Views: What impact will turquoise have on CFD’s and Spread betting?
Patrick Latchford (CMC Markets): “Because Turquoise is focused on physical delivery it is unlikely to have any impact on the derivatives market. In some instances pricing may become more complex as there will be another underlying exchange to monitor but with only the most liquid stocks being quoted, market efficiency means arbitrage opportunities are unlikely to be seen with any degree of regularity.”
Mike O’Loan (World Spreads): “It could offer a more efficient way for us all to access the market and help lower prices. The more competitive our dealing costs, the lower our prices. If we can seek out a competitive advantage, we would pass it onto our customers. It is good to have another exchange to break up the current monopoly and broaden our options. I am optimistic that it is a step towards tighter spreads.”
Clem Chambers (ADVFN): “It will take a while to have an impact as a lot of people will have to be trading on it before it takes off. But in due course it should bring transaction costs down by offering competition to the incumbent London Stock Exchange and eventually starting a price war. Ultimately, it will generate better pricing for the customer and the market as a whole.”
Tim Hughes (IG Index): “In a short space of time we have gone from one exchange, the LSE, to three. The exchanges are competing out and out on price and Turquoise could make a land grab in terms of cheaper costs immediately. It is a significant development. As a broker, we have the opportunity to shop around for the best bid-offer spread, rather than be beholden to one exchange.”