3rd CEPR-Imperial-Plato Market Innovator (MI3) Conference 2019 – Keynote: Market Structure in Europe and Beyond



3rd CEPR-Imperial-Plato Market Innovator (MI3) Conference 2019

Keynote: Market Structure in Europe and Beyond

Robert Barnes (Turquoise)


Dr Robert Barnes is the CEO of Turquoise. He has extensive industry experience and market knowledge having formerly been CEO of UBS MTF and a Managing Director, Equities, at UBS. He holds a PhD from Cambridge University and a BA from Harvard, and was formerly Chairman, 2004-2009, of the Securities Trading Committee of the London Investment Banking Association


Main Takeaways and Quotes


Barnes began by explaining that “what I’d like to do today is really just share with you the humble view of how we’re linking into the real economy, which is about converting risk capital into working capital, and that all the innovations that we’ve been discussing about secondary trading efficiency to provide confidence that then recycles into our markets”


He demonstrates the success and milestones of the London stock exchange group, citing a $10 trillion capital raised on the LSE, $1.1 quadrillion of derivatives cleared by SwapClear in 2018 to support G20 and global financial stability, and $16 trillion of assets under management using FTSE Russel benchmarks.


“Nine out of ten largest IPOs in London were non-UK companies; in fact, two of them denominated in dollars, and last year that has continued – three out of five still happening – so we are very pleased to be international”


One of the biggest questions Barnes faces is “what about Brexit?”: since the referendum, he responds, “we have literally trillions of dollars of assets; 1,850 equity deals, $134 billion in 8 different currencies […] how much of that has been from outside of the UK? How much of it is international? 410 of these equity transactions were by 212 international issuers from 53 countries. In the fixed income over 1,900 of these debt transactions from these 51 countries, raising an aggregate $725 bil. And of all those hundreds of those exchange listings, 95% international”


Though USGB is about 8X the size of the UK, Barnes notes that its only 3X the IPO proceeds, and in terms of Small Caps and SMEs, we are directly on part (47 over the last 5 years) with a significantly lower cost of listing (3.9% UK as opposed to 6.2% US).


IPOs and international trading


The next phase of the discussion highlights a series of Case Studies, noting that the “quality of the large institutional investors […] willing to invest in this type of company shows how sophisticated we are as an international community, here in London.”


Barnes also notes the increase in the number of fintechs launching here in the UK. Furthermore, he note that only 49% of LSEs institutional investors are, in fact, from the UK – the majority of investors are worldwide. 72% of all the capital raised for SMEs were actually listed on AIM.


Most recently, the LSE has been working more with Shanghai following President Xi’s visit to London in 2015. Hong Kong has a “fabulous model, very liquid, and allows you get exposure to Shanghai stock exchange listed A shares that must remain in China, and the Hong Kong [listings] must remain in Hong Kong” – the model that has arisen is the only model in the world where Hong Kong companies can raise hard capital outside of London.


LSEG’s liquidity advantage


Barnes introduces this section as an analysis of “how secondary trading and all the things that we’ve been working together helps bring confidence into capital raising […] through the single connection into our datacentre, you can access the largest primary equity market in Europe, London, and Turquoise through a simple cross-connection”


He demonstrates the broad sweep of choice of trading mechanisms on order book execution channels, from Turqouise Plato Continuous, Uncross and Block Discovery.


MiFID II was catalysed by a 2001 report; the Committee of Wise Men which provided the framework of transparency, competition and investor protection.


“It was really saying: demographics. Developed country populations are getting older and living longer, which is a good thing, however, governments and companies are no longer providing finance salary pensions, so therefore we should be privatising pensions through the financial markets”


The puzzle that arose at that time was that US assets were growing faster than Europe. The complexity of the European market structure leads to many challenges around cross-border settlements. We also see a major shift away from the US in terms of equity market share – in 1998, 52% was traded on the NYSE – its now only 12.6%. In Europe, a similar pattern can be seen: LSE has dropped from 96% in 2008 to 65% in 2017. However, this is still nearly two thirds of all trades operating through the primary (LSE); a “magnet for execution”.


By April 2019, this has raised to 70%, with 5% taking place on Turquoise following MiFID II. “The insight is one independent London Stock Exchange surveillance team can look at over three quarters of the activity of the stock that is listed on primary […] a quarter of the activity in Europe is effectively happening on the same platform”.


Interesting trends can also be seen in the closing auctions: in 2010, 15% of trades took place in the closing auction; that number has more than doubled to over 30% as of May 2019 (not including SIs).


Turquoise prices


Barnes then demonstrates how Turquoise prices are similar to those of other venues, with competitive tariffs. “The insight is that, even for your generic crisis, if you want to have a quick view of what’s happening around all the constituents in Europe, feel free to take a look at your friendly neighbourhood Turquoise Data Feed.”


Electronic order book trade sizes


Barnes highlights the shrinking trade sizes of average trades – back in 1998, the average was as high as £65,000 on the LSE; it is now as low as €10,000. “The puzzle is how do we address that?”


He demonstrates with a typical strip, “An investor wishes to buy 8000 shares which is larger than the best offer of 1450 shares at the best price of 102 on the Primary Exchange and another 1070


shares at equal best price of 102 on Turquoise. For immediacy, the investor chooses to


‘cross the spread’ and ‘lift’ the ask prices from 102 up through 103.5 to trade against the best sell orders resting on the Primary Exchange and Turquoise Lit Order Books. Crossing the spread adds to the implicit cost of the investment.”


In this case, rather than fully cross the spread in the Lit markets, the investor chooses to seek liquidity in the Turquoise Plato Order Book, where they can trade at the primary market mid-price, thereby saving half the spread and achieving price improvement.


He demonstrates with a Swiss stock, where the tick size is a relatively large 0.05 – all Turquoise dark trades are at the midpoint, “Midpoint dark trades enable price improvement by matching inside the lit orderbook minimum tick size price levels.”


EMEA Trading Conference 2016


Barnes raises a live survey run at the above event during the Accessing Liquidity Panel – 51% of the participants present expected more block trading, and 46% said they were using Turquoise Block Discovery (more than any other book innovation).


Turquoise Plato Block Discovery


He then demonstrates the ‘hockey stick’ effect of Turquoise Plato Block Discovery- 98% has been traded since the September 2016 Plato cooperation. The UK referendum – the high point of European volatility – appears as a blip in comparison to the Turquoise-Plato partnership.


“It took us three and a half years to do the first €100bn, in terms of value traded as electronic blocks, and just one year to double it. Thank you very much to the customers for letting us do this”


Barnes highlights how you can trade mid tick, regardless of size of the trade. The effect of this is that Turquoise trades at €1m+ will save 100x+ post trade clearing costs compared with average dark pool trade size of €10k where clearing costs relate to number of trades.

“There’s very significant economies of scale of trading blocks as well as minimising the market impact”


When tracing the high volume trades against time of day, you also see that high volume trades don’t “bunch up” towards the close of the trading day. There has also been a rising trend in the volume of these trades on the platform.


“The largest single sided trade that we’ve seen that was partially executed was €180m, so the community is getting more comfortable with the service.”

Turquoise was selected as an example of best practice in the Parliamentary Review 2018 – “it’s amazing to see a bubble chart in a parliamentary review”.


He also highlights how the most active hours of Plato Turquoise trading are at the beginning of the trading day. “A little bit of lift-up with the introduction of the US market, but this is a beautiful complement to the primary stock exchanges that have the closing auctions, so together we are adding liquidity for both.”


Low Reversion


Barnes draws insights from LiquidMetrix’s independent analysis in 2015, which finds that, with Turquoise Plato Uncross, 10% of the reference prices will have moved following a trade, compared to around 50% with Turquoise Plato Continuous or BXE Dark.


Between 2015 and 2017, the pattern remains the same despite 35X the values traded in October 2015. The same pattern can be seen in an independent analysis from Big XYT in February of this year.


We also see an increase in the number of stock symbols active month by month – from around 1,600 in early 2013 to between 2,900 and 3000 now in 2019.


Rise of AIM Liquidities on Turquoise Lit


On first day of admission, 21 Member Firms traded 31 AIM securities. Despite the larger bps size seen on AIM spreads being 10X wider than those seen on FTSE 100 blue-chips, you are still able to achieve a safe midpoint through a randomised function.


“What’s remarkable is, not only are we adding midpoint liquidity, but the primary stock exchange, the LSE is seeing more lit and auction activity, so having the extra business done […] you probably want to go to the place where there’s more action.”


“It’s truly remarkable the list of institutions that have joined [the Plato Partnership]”


Barnes also demonstrates the rise of Turquoise Plato’s liquidity improvement; Turquoise Plato now achieves over €870m of daily turnover according to Rosenblatt Securities (as of May 2019) representing €885 bil of value since 2013.


Barnes closes by thanking the team, and expressing how pleased Turquoise is to be working with Plato and how “excited we are to be a part of this amazing innovation”.



Images: Muhammad Ashraf ©2019