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The end of SWX Europe Wednesday, November 12, 2008

Many years ago, I was involved during the early stages of a fledgling Recognised Investment Exchange in the UK called Tradepoint. The model it operated was revolutionary and addressed many of the flaws in the LSE operated model of the day.

They introduced the notion of clearing and a central counterparty to the UK equity market, using LCH as the operator of the arrangements. This was quite radical, monetising for the first time the inherent counterparty and market risks that went with current trading and settlement practices. Pre and post trade anonymity were side-effects of this structure and its' operation was underpinned by a reliance on electronic trading. Unfortunately, things that are now taken for granted were shunned by a market participants of the day who were happier with the status quo, prefering to ignore the risks, as well as remain inefficient.

Tradepoint had been launched with the backing of several banks, but who significantly avoided having to commit flow/liquidity to the new Exchange. As a consequence, despite being cost efficient thanks to its' technology, trading volumes were pitifully low and so it struggled in financial and credibility terms. In 1999, the business was re-financed and re-launched by a new consortium including Instinet. However, in 2000, amidst a backdrop of European Exchanges mergers & acquisitions, the Swiss Exchange bought Tradepoint and subsequently renamed it Virt-X.

In 2003, the business was finally forced to re-focuss its' efforts on the Group's key offering around Swiss stocks. Sadly, the Swiss Group this week announced the closure of SWX Europe, as the business became known.

Interesting there are many parallels between Laker Airways and today's low-cost airlines, and the link between Tradepoint and today's Multilateral Trading Facilities ["MTF"] such as Chi-X, Turquoise and BATS. Both were ahead of their time and sadly neither benefited from the revolution they foresaw.

I shall fondly remember "Tradepoint" and the contribution it made.

Labels: Chi-X, London Stock Exchange, LSE, MTF, Stock exchange

posted by John Wilson @ 11:53 AM Permanent Link ,

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LSE outage demonstrates its' importance Tuesday, September 09, 2008

Image via Wikipedia Yesterday's connectivity outage at the London Stock Exchange appears to have demonstrated the parasitical nature of some of the "competing" execution venues. Despite being "off-air" for most of the day, trading did not apparently switch to the other venues and some were left floundering in the absence of a price formation mechanism normally supplied by the "primary market" [LSE].

Measured by the value traded, Chi-X looks to have been down by a third on the previous business day [Friday]. Turquoise and ITG were similarly affected.

There are several possible reasons for this failure
- Too few firms were signed-up as customers of the alternates to enable the market to switch entirely. However, business levels weren't even maintained on the alternates.
- Some business on alternates may be as a result of artibrage trades between the primary and alternate markets, but the closure of one of these meant these opportunities weren't available. However, it is unlikely to represent a significant chunk of volume.
- Investors/Dealers were nervous to trade anywhere in the absence of the primary market, concerned that they had imperfect information on which to trade. Likewise without clarity over where liquidity would migrate to [missing herd instinct] traders stayed put and waited. Hence volumes everywhere dipped.

Of course, this outage should encourage firms to implement the means to trade on alternate venues in order to mitigate against similar problems in the future. However, I think the execution venues will need to do some self-scrutiny to understand why they failed to capitalise on the opportunity and initiate plans that will seek to address the issues. Most importantly, they have to persuade the "herd" that grazing on their turf is the perfect substitute.

Meanwhile, the Daily Mash has an excellent spoof report on how the market reacted yesterday, which was reproduced in the Daily Telegraph.