Bats And Turquoise On Brink Of Unlocking Spanish Market

Terry Flanagan

Bats Chi-X Europe and Turquoise are piling the pressure on incumbent exchange Bolsas y Mercados Españoles (BME) in a bid to finally crack the Spanish market.

The two leading pan-European multilateral trading facilities are using price promotions on Spanish stocks in an attempt to further weaken the previously monopolistic grip of BME.

Spain, Europe’s fourth largest equity market, has proven hard for multilateral trading venues to break into due to the failure of Spanish regulators to fully embrace the European Union’s 2007 Markets in Financial Instruments Directive (MiFID), which set out to integrate the region’s financial markets. However, these issues were partly addressed last year, when BME relaxed rules around the settlement of Spanish shares, leaving the way clear for new entrants.

Of Europe’s major financial centers, only Spain’s local exchange retains the majority of trading in domestic shares. The introduction of MiFID in 2007 saw competition boosted among exchanges across Europe and low-cost venues such as Bats Chi-X Europe and Turquoise sprang up—wiping out the monopolies the incumbent venues once held. Now, up to a third of trading in British, French and German shares is done on these cheaper exchanges.

BME, which had a market share of over 98% at the start of last year, recorded a market share of just 92.7% in March this year, the lowest figure yet recorded, according to data provided by Thomson Reuters. The current month-to-date figures for April reveal that BME now has a 93.4% market share with Bats Chi-Z Europe having 5.5% of the pie and Turquoise with 0.75%, according to data from Bats Chi-X Europe.

In October last year, Bats Chi-X Europe embarked upon a pricing promotion, providing a rebate of 0.3 basis points, on six of the largest and most liquid stocks on the IBEX 35, Spain’s benchmark stock index. It also offered discounts on clearing and settlement fees for large orders of shares in the six stocks.

And in January, Bats Chi-X Europe extended the rebate to all IBEX 35 stocks, although this did not extend to discounts to post-trade costs. The scheme has now been extended to the end of June, and possibly even longer.

The Spanish market share of Bats Chi-X Europe, which was formed by the merger of Bats and Chi-X in November last year, has grown from less than 1% before the pricing promotion to above the magical 5% barrier in the last week or so. This 5% figure is viewed by market participants as when brokers and other traders begin to take a venue more seriously in terms of best execution.

“BME has been transparent about competition in MiFID, which is all about front office execution but in every other European market there’s been competition front-to-back through to clearing and settlement—but it still doesn’t really exist in Spain,” Jerry Avenell, co-head of sales at Bats Chi-X Europe, told Markets Media at WBR’s Trade Tech Europe 2012 industry event in London this week.

However, Avenell said that Bats Chi-X Europe’s push in Spain is finally beginning to bear fruit.

“With pricing promotions there is an element of inertia but it is working,” he said. “The liquidity pool is increasing where spreads are becoming equal to the BME so we are starting to get a similar, but not exactly the same, model to what we have for other markets in Europe that we have cracked.

“From what you have seen in any market over the last five years is that the really big challenge is to get that first 5% trading volumes and then over the next eight to 10 weeks you will tend to see gradual progression towards 10% market share. So we’ve been over 5% for a week or so, and we had significant activity last week around [oil firm] Repsol and the nationalization of Repsol in Argentina. It is a fairly unique event but intraday we were nearly 30% in Repsol—so that helps. It draws attention to the fact that there are alternatives.

“Some structural issues have been sorted out so that forces clients into the markets because their clients, the buy side, are asking about best execution and why aren’t you trading the stock that is 30% fragmented on a particular day.

“And all of these events begin to stack up in our favor so we are pretty patient but it has taken a lot longer in Spain because of these issues but we hope to see the progress continuing.”

Turquoise, owned by the London Stock Exchange, has followed Bats’ lead and, from May 1, is introducing a six-month pricing promotion on the six most liquid Spanish stocks, doubling the rebate from 0.2 to 0.4 basis points.

There will also be a higher rebate of 0.5 basis points awarded for incremental passive business above €120 million a month and the introduction of a 0.2 basis points take fee for aggressive business.

“We are delighted to introduce this new promotion to our customers, which will make Turquoise the most attractive venue for trading the six most liquid Spanish stocks,” said said Adrian Farnham, chief executive at Turquoise.

“By concentrating liquidity and improving execution quality for all participants, we are committed to being at the forefront of the competitive landscape in Spain. We will continue to work closely with our customers, providing them with the most efficient and cost effective trading solutions in the region.”

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