THE FUTURE OF TRADING IS NOW.
By Dr Robert Barnes, CEO, Turquoise.
The catalyst for Plato Partnership 1, 2, 3
Asset managers, like AXA Investment Management4, 5, BlackRock6, 7, 8, Deutsche Asset Management9 (see page 14), Fidelity10, 11, and Norges Bank Investment Management12-17, have with increasing frequency published views about the role of exchanges in well-functioning markets and the need for innovation in electronic block trading. Their views among others, were heard at the FIX Trading Community’s 8th annual EMEA Conference in March 2016, which had nearly 900 delegates from 22 countries, comprising 23% buyside; 26% sellside; 28% vendors and 23% exchanges and others.
During an electronic vote23, attendees were asked “What one thing concerns you most in 2016?” 47% answered: “Everything to do with MiFID II”, followed by 17%: “The search for liquidity”. While more than half the audience (51%) answered “More Block Trading” when asked, “As a result of impending regulation, what do you expect in 2018?” (see Fig 1).
The prize is a Large In Scale electronic execution channel that works. We hear the buyside asking the sellside to provide access and return meaningful execution reports; from the sellside, the request is for the buyside to send larger parent orders via the sellside. Repeatedly buyside dealers have expressed their opinion of the importance of a trusted public exchange in the trading ecosystem to be accessed by institutions or any investor, the sellside continue to play a role.
Turquoise has been listening and innovating with customers, turning these ideas into actions24, 25. In fact, our Large In Scale electronic execution channel received 46% of the vote when the financial community was asked “Which order book innovations are you most using?” (See Fig. 1).
The new reality – Turquoise Plato
The latest innovation comes with the recently announced partnership between Turquoise and Plato Partnership. The resultant Turquoise Plato™ encompasses all of the Turquoise non-displayed services, including the award winning Turquoise Block Discovery™ and Turquoise Uncross™ – rebranded as Turquoise Plato Block Discovery™ and Turquoise Plato Uncross™. Turquoise Plato Block Discovery™ matches undisclosed Block Indications that execute in Turquoise Plato Uncross™.
Our aim is to grow Turquoise Plato™, as more buy and sellside firms adopt and optimise workflow to deliver best results on a continuous basis. Turquoise Plato™ key differentiator is that Turquoise Plato Block Discovery™ is a Large In Scale electronic execution channel that has nearly two years of empirical data. This solid track record has robust reputation scoring, designed to avoid information leakage and deliver quality execution. Turquoise Plato Block Discovery™ matches undisclosed Block Indications that execute in Turquoise Plato Uncross™.31, 32
Empirical data through to the end of August 2016 shows that users of Turquoise Plato Block Discovery™ benefit from:
- High firm up rates – Consistently more than 90% of order submission requests arrive in time and in full Block Indication size or larger;
- Low reversion – Block Indications matched by Turquoise Plato Block Discovery™ execute in Turquoise Plato Uncross™. In this mechanism, after 1 second following execution the PBBO mid reference price has changed in less than 10% of occasions, as per independent analysis by LiquidMetrix; this compares well with the 50% for continuous dark pools;33
- Higher average trade size – Turquoise Plato Block Discovery™ now averages more than E250,000 per trade, and this average is more than 25 times larger than the average E10,000 for electronic trades matched by continuous dark order books across Europe; these size results continue to grow compared to prior publication.34
In the intraday chart enriched by trade size (see Fig. 2), investors are trading shares of the German company, Fresenius, on multiple trading platforms including Xetra – the electronic order book of its primary listing exchange, Deutsche Boerse – and Turquoise. This illustration shows the prices and sizes of trades by investors on 7 April 2016. Turquoise trade prices are similar to those of the primary Stock Exchange, while trade sizes serve both the smallest and largest orders through its single connection for straight through processing from trading in London to settlement into Germany. Turquoise not only enables investors to access more than 35% of the order book value traded that day, but it also matched the very largest order book trades of all venues that day via its award winning electronic block trading innovation Turquoise Plato Block Discovery™.
Key insights are that:
- Turquoise Plato™ is growing in partnership with customers, turning ideas into actions;
- Turquoise Plato™ innovations are working consistently well: even post EU Referendum extraordinary activity,
- Turquoise Plato™ maintains its differentiated profile:
– e.g. Turquoise Plato Block Discovery™ has ~50% activity greater than 100% Large In Scale thresholds; this compares with each of European continuous dark pools just ~1%;
– and on the 24th June, the shock day of the EU Referendum results, 75% of value traded was >100% Large In Scale.
- Turquoise Plato Block Discovery™ 2016 continues to set new records, with each month outperforming the one before, including July, August and September, each larger than June’s EU Referendum activity.
Reliability and 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 empirical quality of the LIS trading mechanism, and an independent surveillance oversight add further to confidence in the integrity of Turquoise Plato Bock Discovery™ for the matching of undisclosed Block Indications that execute in Turquoise Plato Uncross™.
• Conventional order books tend to shrink trade size.18, 19
• Europe also faces impending regulatory change.20
• MiFID II’s ‘double volume cap’ calculations start January 2017 and will allow only order activity above Large In Scale thresholds to avoid the caps starting January 2018.21, 22
• Repeatedly Buy side dealers have expressed their opinion of the importance of a trusted public exchange in the trading ecosystem to be accessed by institutions or any investor, the Sell side continue to play a role.26, 27
• The requirement for the first time is for the Buy-side, Sell-side and trading venue to collaborate in a new way. Plato Partnership entered into a Cooperation Agreement with Turquoise28, 29 to explore this.
• Our response is Turquoise Plato™.30
 Stafford, Philip. “Banks and fund managers plan new European equity venue” Financial Times, December 17, 2014.
 Baker, Sophie. “Investors warming up to trading venues being created by manager groups” Pensions&Investments, February 23, 2015. www.pionline.com/article/20150223/PRINT/302239971/investors-warming-up-to-trading-venues-being-created-by-manager-groups
 Plato Partnership. “Formation of Plato Partnership complete” September 6, 2016. www.platopartnership.com/assets/plato-formation.pdf
 Laurent Lionel and Hutchison Clare. “Fund managers push for safer trading waters in dark pools.” Reuters, October 20, 2014.
 Stafford Philip. “Turquoise aims to lure institutions’ block trades to dark pool” Financial Times, October 20, 2014.
 Novick Barbara, Prager Richie, de Jesus Hubert, VedBrat Supurna, Medero Joanne. “US Equity Market Structure: An Investor Perspective” BlackRock Viewpoint, April 2014. www.blackrock.com/corporate/en-gb/literature/whitepaper/viewpoint-us-equity-market-structure-april-2014.pdf
 Novick Barbara, Fisher Stephen, Parkes Martin, Mahoney Michael, Mcleod Tim, Rosenblum Alexis. “Improving Transparency” BlackRock Viewpoint, August 2016. www.blackrock.com/corporate/en-pt/literature/whitepaper/viewpoint-improving-transparency-august-2016.pdf
 Novick Barbara, Goldstein, Rob, Evans Phil, Perlowski John, Clement Michelle, Rosenblum Alexis. “The Role of Third Party Vendors in Asset Management” BlackRock Viewpoint, September 2016.
 Bellaro, Mike. “Buyside Profile: Deutsche Asset Management” Best Execution, Autumn 2016, pages 14-17. https://www.bestexecution.net/?p=5731
 “Modern Markets: benefits and challenges” Fidelity Viewpoints, 2 February 2015.
 Barnes Robert, Finney Jonathan, Hilton James. “Finding Blocks – A Case Study – Industry Collaboration in Action” Global Trading, Q1 2016, March 2, 2016, pages 64-67.
 “Well-functioning financial markets” NBIM Discussion Note, November 2012.
 “High Frequency Trading – An Asset Manager’s Perspective” NBIM Discussion Note, August 2013.
 “Sourcing liquidity in fragmented markets” NBIM Asset Management Perspective, April 2015. www.nbim.no/contentassets/1b25761cb30e4025b627865627610dab/asset-manager-perspective_1-15.pdf
 Shanke Øyvind and Emrich Simon. “Trading in Dark Pools – An Asset Manager’s Perspective” Global Trading Magazine, 18 April 2015. https://fixglobal.com/home/trading-in-dark-pools-an-asset-managers-perspective/
 “Role of Exchanges in Well-Functioning Markets” NBIM Asset Management Perspective, August 2015. www.nbim.no/contentassets/03b3c386e08a4b59ba24bfc7d44d77e1/asset-manager-perspective-2-15.pdf
 Mortensen Pauli and Schanke Øyvind. “Taking the Liquidity Reins“ Best Execution, July 11, 2016
 Even if a large order is on one side, if the other side is a small order that can match then the result is trade size smaller than the large order; or, if the large order has a Minimum Execution Size above that of the smaller order, there is no trade.
 Barnes, Robert. “Dark pools and best execution” Best Execution, Summer 2015, pages 79-81. www.bestexecution.net/analysis-dark-pools-best-execution/
 FCA. “Firms will need to start planning for the MiFID II changes ahead of the finalisation of the EU implementing legislation and the subsequent changes that we and the PRA make to our Handbooks, and changes that HM Treasury makes to financial services legislation.” www.fca.org.uk/markets/mifid-ii
 European Commission. “A Directive and a Regulation extending the application date of MiFID II and MiFIR by one year have been published in the Official Journal of the European Union. The date of application will be 3 January 2018. The transposition of MiFID II into national laws has also been extended to 3 July 2017.” Updated rules for markets in financial instruments: MiFID 2, 30.06.2016. www.ec.europa.eu/finance/securities/isd/mifid2/index_en.htm
 Barnes, Robert. “Dark pools and best execution: Turquoise Block Discovery™” Best execution, Autumn, November 3, 2015, pages 69-73. www.bestexecution.net/analysis-dark-pools-best-execution-3/
 Healy, Tim. “FIX EMEA Conference 2016: Key findings” Best Execution, April 10, 2016.
 Barnes, Robert. “Forward thinking: Aρετη! Excellence and its pursuit through collaboration” The Trade, THE TRADE HOT 100, 22 April 2016, pages 18-19. www.thetrade-digital.com/thetrade/the_trade_hot_100?pg=18#pg18
 “In less than 10 years from concept in 2006, Turquoise activity has grown from nothing to more than €1 trillion value traded in 2015 and achieved industry recognition for its innovations including Turquoise Uncross™ and Turquoise Block Discovery™ designed in cooperation with Turquoise buy side and sell side customers for quality electronic trading of larger sized investments. Turquoise won the Financial News 2015 Award for Excellence in Trading and Technology for Most Innovative Trading Product/Service for Turquoise Block Discovery™” in Barnes, R. “Turquoise” The Parliamentary Review 2016 [Issue: Finance Edition], September 2016, pages 33-35. www.theparliamentaryreview.co.uk/editions/pdfs/TPR2016-Finance.pdf
 Laurent Lionel and Hutchison Clare. “Fund managers push for safer trading waters in dark pools.” Reuters, October 20, 2014.
 Cooper, James. “Disintermediation? Don’t Bank On It.” Global Trading, March 29, 2015. https://fixglobal.com/home/disintermediation-dont-bank-on-it/
 “Plato Partnership enters Cooperation Agreement with Turquoise“ Best Execution, September 6, 2016.
 Turquoise Plato™ Collaboration. Innovation. Execution.
 LiquidMetrix Turquoise Uncross™ – Execution Quality Analysis by Dr Sabine Toulson & Dr Darren Toulson, extracts of presentation to Turquoise Buy Side round table, 13 November 2015.
 Barnes, Robert. “Turquoise Block Discovery™ Firm Up Rates: Integrity Matters” Best Execution, February 1 2016, pages 82-84. www.bestexecution.net/industry-viewpoint-dr-robert-barnes-turquoise/