Chi-X Europe Limited
European equity market fragmentation:
One year on from MiFID
Jerry Avenell, VP Business Development
January 2009
Which Route do we take?
First there was the long straight road to the primary exchange
2
Inefficiencies of the Incumbents
"Nasdaq was an incredibly costly provider. They sucked
down all that tape revenue, and their equipment was old
and clunky" (Analyst, Celent Communications)
3
"America sneezes…"
1969
Instinet founded
1976
Consolidated Tape System introduced
1997 Instinet becomes the first Electronic
Communication Network (ECN) to be recognised
by the SEC. Other major players include
Archipelago, Brut and Island
The emergence of ECNs offers traders greater
speeds at lower costs, in addition to anonymity
2001 Up to 40% of the volume in NASDAQ
listed shares being traded on ECNs
2002 NASDAQ launches SuperMontage trading
platform in response to competition
ECN Archipelago gains stock-exchange status
under the name of ArcaEx
Island ECN acquired by Instinet to form INET
2005 INET taken over by NASDAQ
2006 Merger between NYSE and ArcaEx
4
US Equities: November 2008 Volumes
Total ADV = 10.6 Billion Shares (-13%)
5
Different reasons for European fragmentation
Regulation
Currency
Culture
Technology
6
Incumbents Response To Change
“The test for MiFID will be whether competition will
increase liquidity and efficiency. The risk is that the
benefits of competition for investors will be lost to the
increase in fragmentation.
Wider spreads and an increase in the cost of trading
and the cost of market data would undermine the
whole aim of MiFID….”
Source: Financial News quoting LSE CEO Clara Furse speaking at FESE
Conference June 2007
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7
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Exchanges v MTFs – What’s the difference?
Exchanges
9
MTFs
RIE (Listing function)

No
Market data fees

No
Technical costs

No
Membership fees

No
Complex trading tariffs

No
Closed Communications network

No
Pan European trading
No

Pan European clearing
No

Obligated Market Making

No (except TQ)
Heavy duty rulebooks

No
Out with the old….
10
In with the new…Chi-X’s Value Proposition
FASTER
CHEAPER
SMARTER
11
Technology
Capacity
Connectivity options
Lower trading costs
Free market data
Lower clearing costs
Visible & non-displayed order types
Simplified trading process
Smart Order Routing
Smarter Connectivity Options
The diagram below shows the various connectivity options that are available as of December 2008
Following the migration of Chi-X’s primary data centre, participants will have the option to co-locate
with Equinix
Client
Connectivity
Layer
Equinix Service
Provision
Chi-X Equinix Suite
Order entry
Co-lo
1.4 - 2 ms
+/- 5 - 7ms
Network
Service
Provider
CHIX MD
+/- 3ms
Leased
line
550 microseconds
Quotes
Round trip latency in all cases
12
Speed: Roundtrip Latency By Venue
Chi-X internal latency is 550 microseconds
Trading Venue
Chi-X Europe Ltd
Average Latency
(milliseconds)
5 (third-party extranet)
3 (leased lines)
1 (proximity hosted)
LSE SETS
14
Deutsche Börse Xetra
37
Euronext
75
OMX
137
Borsa Italiana
174
SWX
284
SWX Europe
291
Source: Internal system performance measurement statistics for average DMA order messaging in November 2007, supplied by Chi-X trading
participant. These internal figures are for round trip latency message acknowledgement based on sending an average number of messages to the
exchange system and obtaining a response back to the participant's system over the course of a normal trading day.
Please note: These figures are provided for illustrative purposes only and are not intended to represent an independent performance measure of
latency.
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More Capacity = Faster Trading, No Time Lag
Chi-X can currently handle up to 115,000 messages per second without a degradation in latency
At its peak on 14th November, the number of messages handled per second (31,091) was around
41% of the total capacity
A peak market data output of 40,953 messages per second occurred on the same day
=
14
Trading Tariff
The Chi-X business model is based on the principle that the user pays only for services
consumed
Trading fees on Chi-X
Aggressive execution fee
0.30bps
Passive execution rebate
0.20bps
Order entry, amendments & deletions
no charge
Membership & application
no charge
Market data
FREE
OTC trade reporting (optional)
£210 pcm
Aggressive execution
Order hits Chi-X order book and immediately results in execution
Passive execution
Order is placed on Chi-X order book and executed as a result of being hit by an incoming order
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Order Types on Chi-X
Order types permitted
Chi-X
LSE
SWX
Europe
Limit





Market





Iceberg





Execute or Eliminate





Fill or Kill





Hidden*

No
No
No
No
Mid Peg*

No
No
No
No
Primary Peg*

No
No
No
No
*Hidden, Mid Peg and Primary order types are not available on
many of the existing European exchanges
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Deutsche
Euronext
Borse
Simplified Trading Process
Chi-X offers a simplified trading process and uniform, straight forward pricing across European
securities markets
Flat rate for both execution and clearing throughout Europe and flat rate for settlement which varies
by market
Clearing performed by EMCF across European Markets
Traditional Trading Process
Chi-X Trading Process
Trading Participant
Other
Marketplaces(1)
Execution
Clearing
Ltd
SA
Settlement
Note: EMCF is a full service clearing provider across European markets
(1) Each marketplace has a separate and distinct trading process
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Trading Participant
Respective
Clearing Agent(1)
Respective
Settlement
Agent(1)
Domestic
CSD
Cheaper: EMCF Clearing Fees
EMCF has introduced further fee cuts with effect from 1st August 2008
All clearing fees are stated in Euros
Market
Initial fees
1 October
2007
1 March
2008
1 May
2008
1 July
2008
1 August
2008
Overall
difference
Netherlands
0.30
0.28
0.19
0.14
0.10
0.05
-83.3%
Germany
0.25+0.075 bp
0.20+0.075 bp
0.19
0.14
0.10
0.05
-80.0%
UK
0.18
0.17
0.15
0.12
0.10
0.05
-72.2%
France
n/a
0.28
0.19
0.14
0.10
0.05
-82.1%
Switzerland
n/a
n/a
0.10
0.08
0.08
0.05
-50.0%
Scandinavia
n/a
n/a
0.19
0.14
0.10
0.05
-73.7%
Internal / Self
18
0.03
Results: Market Share Growth by Market
Chi-X Average Market Share - Dutch equities
Chi-X Average Market Share - UK equities
18.0%
20.0%
18.0%
16.7% 16.9%
17.8%
17.2%
16.0%
16.0%
14.4%
14.0%
12.2%
12.7%
6.4%
5.4%
6.0%
4.3%
2.6%
8.3%
7.3%
8.0%
6.0%
8.5%
Jun-08
10.0%
8.8%
8.0%
4.8%
3.9%
4.0%
2.7%
2.0%
2.0%
Chi-X Average Market Share - French equities
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Chi-X Average Market Share - German equities
16.0%
14.0%
13.5%
10.1%
10.0%
10.0%
6.0%
Market shares are by market rather than by index
Market share: % of Combined Primary Exchange & Chi-X Turnover
Feb-08
1.4%
Dec-08
Sep-08
Aug-08
0.0%
Jun-08
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
0.0%
2.1%
2.4%
Jan-08
2.0%
Dec-07
2.2%
1.2%
5.8%
3.8%
4.0%
2.7%
Mar-08
4.1%
4.0%
5.5%
May-08
5.8%
Apr-08
6.7%
5.8%
6.0%
8.6%
7.5%
8.0%
8.0%
9.6%
9.3%
8.7%
Nov-08
10.2%
Oct-08
11.0%
10.9%
11.5%
12.0%
12.6% 12.5%
12.0%
Jul-08
14.0%
19
Jul-08
Apr-08
Mar-08
Feb-08
Jan-08
0.0%
Dec-07
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
0.0%
2.0%
13.7%
11.0%
May-08
10.0%
4.0%
14.0%
12.0%
10.2%
14.5%
13.5%
11.2%
12.0%
15.4%
14.8%
Market share highlights
Index
FTSE 100
ETFs
AEX 25
CAC 40
DAX 30
FTSE 250
CAC Next20
OMX H 25
SMI 20
BEL 20
MDAX
OMX S 30
AMX 25
ATX 20
OBX 25
OMX C 20
S&P MIB40
Highest Chi-X
share
22.74%
20.46%
19.12%
16.12%
15.44%
15.28%
10.05%
9.07%
7.47%
6.79%
5.68%
5.51%
5.41%
4.08%
3.23%
3.18%
2.44%
Date
02 Oct 08
17 Jun 08
07 Nov 08
20 Aug 08
20 Aug 08
19 Nov 08
29 Dec 08
25 Sep 08
20 Aug 08
01 Oct 08
18 Dec 08
23 Jul 08
22 Dec 08
03 Sep 08
05 Sep 08
02 Oct 08
16 Dec 08
Sweden
1.39%
Denmark
0.14%
Italy
1.16%
Netherlands
9.83%
Germany
21.07%
Chi-X Gross Consideration
by Market, December 2008
Switzerland
3.41%
Norway
0.13%
Belgium
0.40%
UK
39.65%
France
21.67%
Finland
1.13%
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Austria
0.02%
Cheaper: Basis Points Savings on Chi-X
Average basis points improvements in December were 3.59 bps
Total price improvement savings in Q4’08 were just under €60 million
Execution Savings on Chi-X
80%
4.0
3.6
3.6
3.5
Savings in bps
3.0
2.9
2.7
2.8
2.7
2.4
53%
2.0
60%
2.6
47%
45%
2.0
37%
2.0
34%
51%
41%
44%
40%
50%
43%
42%
36%
40%
30%
20%
1.0
10%
0%
0.0
Jan-08 Feb08
Mar- Apr-08 May- Jun-08 Jul-08 Aug- Sep- Oct- Nov08
08
08
08
08
08
% of Trades Between the Spread
Savings in bps
(1) Represents percentage of trades executed on Chi-X that are inside the spread of the primary
market
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(1)
Dec08
% of Trades Between the Spread
70%
3.2
European Order Book Volumes
Value of Equity trading, October 2008
Exchange / MTF
Value
Order
Book Trades
of Equity trading,
October
2008
1
NYSE Euronext
23,619,285
257,330,000,000
2
Deutsche Borse
14,507,972
243,740,000,000
3
London Stock Exchange
21,389,300
219,570,900,000
4
Spanish Exchanges (BME)
4,249,194
119,009,300,000
5
Chi-X Europe Ltd
14,288,749
109,157,247,286
6
SWX Europe
4,290,604
92,880,600,000
7
Borsa Italiana
6,979,379
72,875,300,000
8
Nasdaq OMX Nordic Exchange
6,113,982
69,942,100,000
9
Oslo Bors
1,563,760
16,937,500,000
10
Wiener Borse
723,204
5,874,000,000
11
Athens Stock Exchange
1,108,738
5,405,100,000
12
Warsaw Stock Exchange
1,105,139
4,668,000,000
13
SIX Swiss Exchange
648,359
4,593,100,00
14
Prague Stock Exchange
129,799
3,367,200,000
15
Budapest Stock Exchange
314,422
2,538,500,000
Figures sourced from FESE, Chi-X Europe figures inserted for comparison
22
Order Book Turnover €
Results: European Order Book Volumes
Value of Equity trading, November 2008
Exchange / MTF
23
Order Book Trades
Order Book Turnover €
1
NYSE Euronext
14,020,309
136,029,000,000
2
London Stock Exchange
14,460,036
129,585,100,000
3
Deutsche Borse
8,766,787
107,252,900,000
4
Spanish Exchanges (BME)
3,334,569
72,912,900,000
5
Chi-X Europe Ltd
8,573,927
57,158,483,917
6
SWX Europe
2,693,138
49,360,500,000
7
Borsa Italiana
4,349,417
42,657,700,000
8
Nasdaq OMX Nordic Exchange
4,171,811
40,429,900,000
9
Turquoise
2,435,028
19,665,636,989
10
Oslo Bors
1,201,920
11,111,000,000
11
Athens Stock Exchange
781,705
3,273,200,000
12
SIX Swiss Exchange
440,571
3,155,500,000
13
Warsaw Stock Exchange
835,287
2,788,200,000
14
Wiener Borse
378,606
2,447,000,000
15
Prague Stock Exchange
85,176
1,550,200,000
Figures sourced from FESE, Chi-X Europe figures inserted for comparison
Fragmentation Illustrated
* Source: Chi-X Europe
**Source: Fidessa Fragmentation Index
FTSE 100 Market Share - MTFs*
100%
Chi-X
75%
Turquoise
50%
NASDAQ OMX
BATS
25%
LSE
% Market Share**
24
07/01/09
31/12/08
24/12/08
17/12/08
10/12/08
03/12/08
26/11/08
19/11/08
12/11/08
05/11/08
29/10/08
22/10/08
15/10/08
08/10/08
01/10/08
0%
Market Share by Venue**
Smart Order Routing
A range of algorithmic strategies can be deployed with a high level of configurability on a per
participant basis
A Smart Order Router allows direct gateway connections to multiple destinations
Enables participants to execute against all eligible quotes on the exchange/ MTF when the
price is equal or better than the consolidated best bid and offer
Marketable orders can be sent to all eligible destinations
Non-marketable orders can be posted to the participant’s chosen destination
Client
Order
Broker
Smart Router
FIX Gateway
Broker
Network
25
Broker
Network
Smart
Order
Routing
Other
MTFs/
Exchanges
Smart Order Routing…
Chi-X Europe Consideration
October 2008-January 2009
26
As it should be
Participant A Consideration
October 2008-January 2009
27
Clearly not working!
Trading Participant B Consideration
October-December 2008
28
Smarter: Chi-X’s Response to the F word
On 8th September 2008 the LSE SETS system had an outage. Trading continued on venues such as Chi-X.
However most smart routers and automated market making machines were referencing the primary market
resulting in reduced trading
Most banks/ brokers/ liquidity providers have said that they are now changing this to reference a consolidated
EBBO/ tape
If a primary market goes down some time in the future it is highly likely that trading will continue across the
alternative venues that trade those stocks
The LSE outage, coupled with the entrance of MTFs to the market, provides a strong reason for the creation of a
consolidated tape. This would prevent a repeat of the problem of traders having no reference prices
Chi-X is currently collaborating with other new trading venues with the aim of developing an EBBO and
consolidated tape, planned to launch in 2009
Chi-X is also working with NASDAQ OMX Europe and BATS on a common symbology
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Tape A – Primary
Tape B – Primary + MTFs
Tape C – MTFs
The importance of technology: Is it an arms race?
MTFs and Exchanges are seen to battle for the coveted status of ‘fastest’
However there is no point having lots of arms in the armoury if they do not
function effectively
More can be less in some cases as diminishing returns set in
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Constant Innovation: Sponsored Access
Sponsored Access will allow the clients of Chi-X Trading Participants to have a direct technical
connection to Chi-X
This will minimise latency, which is essential for the growth in algorithmic trading and, as a result,
trading volumes
A real time drop copy feed will be provided by Chi-X to the Sponsoring Trading Participant relating to
all activity by Sponsored Clients. Other validation checks and controls will also be in place
Normal trading
Client A
order
Trading
Participant
30 ms
order
2 ms
Trading
Participant
Drop-copy feed from Chi-X
TP can stop trading
Sponsored access
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Client B
(Sponsored
Client)
order
2 ms
The Future: Consolidation
In the US a consolidated tape was established when NYSE accounted for less than
80% of the flow
The Consolidated Tape System, introduced in the US in 1976, consolidates data from
several market centres including NYSE, NASDAQ and AMEX, among others, before
distributing the ticker via Multicast
FTSE 100 Overall
Market Share
7 November 2008
Primary
Market
75.6%
32
BATS
0.6%
MTFs
24.4%
Turquoise
22.4%
FTSE 100 MTF
Market Share
7 November 2008
Chi-X
77.0%
The Players on the Landscape
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What does the future hold?
More trading venues are expected to launch
in the coming months. MTF fatigue?
Fragmentation of liquidity will increase
however this will be followed by a period of
consolidation in the market
Algorithms will continue to become more
sophisticated and as part of that Smart Order
Routing will continue to evolve
However there is still a lot to do and we, as
an industry, can work together
Following the launch of Chi-X in March 2007,
up to 25% of the UK volume and 15% in
other major markets is now being traded
away from the Primary market, yet this
volume is not being taken into account as
part of benchmarks and index calculations
What does
mean?
VWAP
now
really
If the primary market is down and
trading continues on other MTFs,
how will indices update?
Cooperation between venues on
harmonised symbology, trading
hours and ticks sizes will create
standards so that each venue can
compete on its own merits
34
“It is not the strongest of the species
that survive, nor the most intelligent,
but the one most responsive to
change.”
Charles Darwin, 1859
35
Questions?
Thank You
36
©2009 Chi-X Europe Ltd (“Chi-X”). All rights reserved. Chi-X is a registered mark. Chi-X
Europe Limited is authorised and regulated by the Financial Services Authority.
This information is provided for informational purposes only. It does not take into account
the particular investment objectives, financial situation, or needs of any individual or entity.
Under no circumstances is it to be used or considered as an offer to purchase or sell any
security, or as a solicitation or recommendation of the purchase, sale, or offer to purchase
or sell any security. While the information has been obtained from sources deemed
reliable, neither Chi-X nor its licensors, nor any other party through whom the user obtains
any such information: (i) makes any guarantees that it is accurate, complete, timely, or
contains correct sequencing of information; (ii) makes any warranties with regard to the
results obtained from its use; or (iii) shall have any liability for any claims, losses, or
damages arising from or occasioned by any inaccuracy, error, delay, or omission, or from
the use of the information or actions taken in reliance on the information. Reproduction or
redistribution of this information is prohibited except with written permission from Chi-X.
System response times may vary for a number of reasons including market conditions,
trading volumes and system performance.
37