Equities trading focus : Electronic block trading : Dr. Robert Barnes

Dr Robert BarnesDELIVERING BEST EXECUTION.

Partnership and innovation deliver Turquoise as the electronic block trading destination that provides the best results on a continuous basis – the very definition of best execution. By Dr Robert Barnes, CEO at Turquoise.

Designed in Europe and refined in partnership with the buyside and sellside, Turquoise Plato Block Discovery™ is a Large In Scale (LIS) electronic execution channel that works. From July 2016, and every month since, Turquoise Plato Block Discovery™ has registered new activity level records above the extraordinary June 2016 volumes coincident with the UK Referendum.

Turquoise Plato Block Discovery™ set a new monthly record by value traded in March 2017 of €2.64bn, an 11% increase over the previous record of €2.38bn set in February 2017. March 2017’s value traded was also more than 13x the €0.20bn traded in March 2016. Turquoise Plato Block Discovery™ has also matched €15.9bn since 20 October 2014 start and 31 March 2017 of which more than €11.8bn or 74% has matched since September 2016 (See Fig. 1).1

High firm up rates

Turquoise Plato Block Discovery™ has more than two years worth of empirical measurements evidencing consistently high firm up rates. These rates result from robust automated reputational scoring, which measures the difference between the original block indication and the subsequent firm order. Since its launch, more than 95% of order submission requests (OSRs) resulted in firm orders into Turquoise Plato Uncross™, within the specified time window of under half a second. In less than 5% of OSRs did the respondent fail to come back within the prerequisite core time and size parameters. The key insight is that the vast majority of Turquoise Plato Block Discovery™ OSRs successfully firm up.

Low reversion = positive differentiation

Turquoise Plato Block Discovery™ Block Indications firm into Turquoise Plato Uncross™ for execution. Turquoise Plato Uncross™ is an innovation that provides randomised uncrossings during the trading day, ideal for larger and less time-sensitive passive orders.

Turquoise Plato Uncross™ has been the subject of multiple studies since 2013 by LiquidMetrix, the independent analytics firm that specialises in venue performance metrics and execution quality analysis,2 and their analysis shows that for Turquoise Plato Uncross™, after 1 second following execution, the PBBO mid reference price has changed in less than 10% of occasions. This compares well with the 50% for continuous dark pools.

According to the report’s authors, Dr Darren Toulson and Sabine Toulson: “Turquoise Plato Uncross™ matching happens at times less correlated with market movements and within the EBBO more readily than continuous dark book executions across all relevant venues. From an execution point of view, large orders left resting on Turquoise Plato Uncross™ are less susceptible to gaming or adverse selection than orders left on other continuously matching MTF Dark pools. The proportion of Turquoise Plato Uncross™ trades executing outside the prevailing EBBO is lower (= better) than continuous dark book trades.”

Higher trade sizes

Turquoise Plato Block Discovery™ is a broker-neutral mechanism for executing anonymous block orders above 100% of LIS thresholds. Today, orders entered are eligible to participate if above 25% LIS. ESMA sets current LIS thresholds relative to an Average Daily Turnover (ADT) metric that segments securities into one of five bands that set a security’s respective LIS threshold.3 During March 2017, Turquoise Plato Block Discovery™ differentiated profile is resilient – 59% of all value traded in March 2017 was greater than 100% x ESMA LIS threshold.

Key observations from Table 1:

  • Where traded activity is above LIS, the average trade size is 1.9x to 2.9x the LIS threshold across all respective ESMA Bands of liquidity.
  • All of the Bands have recorded a maximum successful single trade size well over €1m, the largest to date being €13.1m (this was a single trade in Eni, the global energy company with a primary listing on Borsa Italiana).

For the same ESMA Band 5 blue chip securities that can trade within the single Open Access Turquoise order book, Turquoise Plato Block Discovery™ trades for ESMA Band 5 blue chips above ESMA LIS consistently average more than E1m per trade, and are more than 100x larger than the E10k average trade sizes arising from continuous dark pool activity.

Why this matters

  • Because orders with size above ESMA LIS received by a venue can under MiFID II continue to trade with LIS pre-trade transparency waiver at Midpoint and save half the bid offer spread (= lower implicit costs).
  • Because larger trades that match with minimal market impact and lower implicit costs contribute to long term investment returns.
  • Because it shows Turquoise Plato Block Discovery™ as working LIS electronic execution channel.

Helping investors

Turquoise Plato Block Discovery™ helps investors get their business done by offering additional electronic execution channels. For example, if we look at trading of UK company NEXT plc on 9 March, 2017 (see Fig. 2), the top 5 trades are via Turquoise Plato Block Discovery™ and this represents a 19% (and Turquoise overall 32%) share of trading on that day.

The intraday chart, enriched by trade size, shows NEXT plc trading on multiple trading platforms, including LSE, the electronic order book of its primary listing exchange, London Stock Exchange, and Turquoise. Turquoise trade prices are similar to those of the primary Stock Exchange, and Turquoise trade sizes serve both the smallest and largest orders through its single connection for straight through processing, from trading in London to settlement into Euroclear UK & Ireland. Turquoise not only enables investors to access a third of the order book value traded that day, but Turquoise also matched the very largest order trades of all venues during the day via its award winning electronic block trading innovation Turquoise Plato Block Discovery™.4

A platform you can trust

Surveillance of Turquoise activity, including monitoring of price movements ahead of Turquoise Plato Uncross™ is undertaken by the independent London Stock Exchange Group Surveillance team. Any suspected manipulation of Reference Price will be referred to the UK Securities Regulator, FCA.

A combination of robust automated reputational scoring, independent quantitative analysis evidencing the quality of the LIS trading mechanism, and an independent surveillance oversight adds to the integrity of Turquoise Plato Block Discovery™ for the matching of undisclosed Block Indications that execute in Turquoise Plato Uncross™.

Footnotes:

  1. Sep 2016: www.bestexecution.net/announcement-plato-partnership-enters-co-operation-agreement-turquoise/
  2. LiquidMetrix Turquoise Plato Uncross™ – Execution Quality Analysis by Dr Sabine Toulson & Dr Darren Toulson, 13 Nov 2015, plus further analysis Nov 2016.
  3. Source: COMMISSION REGULATION (EC) No 1287/2006 of 10 Aug 2006 implementing Directive 2004/39/EC: www.esma.europa.eu/system/files/Reg_1287_2006.pdf
  4. Turquoise won 2015 Financial News Award for Excellence in Trading and Technology: Most Innovative Trading Product / Service.

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©BestExecution 2017 

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