Bats Chi-X Europe to Benefit From Direct Edge

Terry Flanagan

Mark Hemsley, chief executive of Bats Chi-X Europe, said there will be benefits from the merger with Direct Edge even though the latter does not have any European operations.

Hemsley told Markets Media: “The Direct Edge deal gives us Goldman Sachs, Citadel and Getco as additional shareholders and will provide an influx of trading ideas which will be applicable both in Europe and the US. In streamlining our technology, we’ll also be able to enhance our market data offering and in time, perhaps bring more US data to Europe. ”

Lenexa, Kansas-based Bats Global Markets completed its acquisition of multi-lateral trading facility Chi-X Europe in November 2011 and Hemsley, previously chief executive of Bats Europe, became chief executive of the combined business. In April 2012 his team completed the migration of Chi-X Europe’s trading platform to Bats Europe technology.

In January this year Bats Global Markets completed the acquisition of US rival Direct Edge but as the latter did not have any European operations, this time Hemsley does not have to plan a technology project.

“The biggest lesson from the Chi-X merger was to keep separate books and let the market decide what it needs,” added Hemsley.

Bats Chi-X Europe still operates four trading books – the BXE lit and anonymous midpoint dark order books and CXE lit and dark books – with different pricing structures.

In February the exchange reported that in February it set new monthly market share records in Spain’s IBEX 35 at 19.1%, up from 8.9% a year ago, Dublin’s ISEQ 20 at 8.4% and Vienna’s ATX at 20.8%. Consolidated European market share was 21.9% last month according to the exchange.

“We will continue to expand in Spain and Italy where market data is much too expensive,” added Hemsley. “We are also seeing increased interest in pan-European trading by retail customers and we are looking at new markets around Europe.”

Competitive Outlook

Bats Chi-X Europe could face increased competition following the IntercontinentalExchange’s acquisition of NYSE Euronext. “We will have to see the strategy of ICE and Euronext going forward and how pricing might change if Euronext has an IPO,” Hemsley added. As a pan-European exchange, our strategy is very different from theirs.”

Consultancy Tabb Group has estimated that low-touch channels in equities trading could reach more than 40% of the commission wallet for the first time this year but trading volumes could be affected by the revisions to the Markets in Financial Instruments Directive governing trading in the region. Agreement on the primary legislative, or level 1, texts for MiFID II was reached in January.

Last year the European Council agreed to impose a cap of 8% on the total consolidated amount traded in any stock during a trading day in dark pools and 4% of total trading per stock on a single dark venue and both of these caps are in MiFID II. However trading volumes across the region are difficult to measure as there is no consolidated tape.

“The Level I text for dark pool caps in MiFID II is highly problematic.The market infrastructure is not in place to measure volumes,” Hemsley added. “The arbitrary limits and how they are implemented could lead to highly volatile situations as the limits are approached and passed.”

Hemsley said Bats Chi-X Europe’s focus this year is growing share in ETFs and depositary receipts but MiFID II could eventually lead to opportunities in other asset classes.

The chief executive said the exchange could consider a deal in Asia if there is the right opportunity to leverage the platforms in Europe and the US. “However, as there isn’t a holistic regulatory framework, you can’t just have a pan-Asian strategy. You need one for Japan, China, Australia and Korea,” he added.

In order to diversify revenues away from equities Bats Chi-X Europe last year launched listings for exchange-traded funds, the BXTR European trade reporting service and acquired a stake in EuroCCP, the new clearer formed from the merger of rivals EMCF and EuroCCP.

Last month BXTR has a market share of 48.6%  according to Bats and Thomson Reuters. After the launch of BXTR, rival Markit Boat said it would stop trade reporting in in September this year.

Hemsley said there are a number of large submitters to BXTR in the pipeline. “We are also working on a project to allow submitting firms to include MMT flags by the end of the second or third quarter,” he added.

In February the Federation of European Securities Exchanges and FIX Trading Community announced that Market Model Typology (MMT)  has become a FIX standard which will allow standardisation in data from trading or trade reporting venues. FESE said MMT can also be used by non-FIX protocols which will make it easier to aggregate data from multiple venues and create a European consolidated post-trade tape.

Dale Brooksbank, head of European trading at State Street Global Advisors told Markets Media in February: “MMT is already going to be standard reporting for Bats, which has been a step forward versus BOAT.”

Hemsley said: “BOAT had decreased costs but was not successful in providing high-quality data of the sort needed by European regulators. Our infrastructure is highly adaptable so it was not too much of a stretch to engineer an efficient, cost-effective system. Our RIE status is also critical – it helps to ensure the quality of data given the regulatory sanctions available to us.”

In May last year Bats Chi-X Europe was authorised as a Recognised Investment Exchange by the Financial Conduct Authority, the UK regulator.

The status allows BATS Chi-X Europe to operate a regulated market for primary listings, which Hemsley said will continue to focus on exchange-traded funds rather than corporate initial public offerings.

iShares, BlackRock’s ETF platform, and Lyxor Asset Management, a subsidiary of French bank Societe Generale, both listed ETFs on Bats Chi-X Europe last November Grégoire Blanc, head of capital markets at Lyxor, told Markets Media at the time “Lyxor is very well placed in Europe and Bats Chi-X is a truly pan-European exchange which complements our model of offering liquidity in ETFs to all European investors.”

Prior to the Bats Chi-X Europe listings venue, issuers needed to list the same ETF on multiple venues in Europe which increased trading costs as clearing and settlement was also in multiple locations.

In order to minimise trading costs, Bats Chi-X Europe also offered a competitive liquidity provider program to ETF market makers. In the CLP program, issuers have a budget to reward market makers who meet specific criteria such as the bid-offer spread, the number of shares and the length of time for which they offer prices. The exchange monitors their performance to allocate the rebates.

Another long-term initiative is Bats Chi-X Europe’s ownership of a stake in EuroCCP. “We wanted to own a strategic stake in the new EuroCCP as clearing develops in Europe,” Hemsley said. “In the long-term we expect to see three or four large scale CCPs in Europe, which will give greater customer choice and lower costs as the CCPs benefit from economies of scale.”

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