Returned from my hols, refreshed and ready to face the start of the new season. The newswires have been awash with stories that Turquoise is exploring its “strategic options” by engaging UBS. Regardless of whether Turquoise is looking at an outright sale or some other, more subtle, form of partnership the story did set me thinking about a number of things.
How would you go about valuing any of the new MTFs that have emerged? What is the right number of these entities that “should” exist? Has Turquoise now “done its job” in terms of changing the face of how European equities are traded?
Valuation is tricky as none of the traditional measures really apply. Chatting to a colleague we concluded that it’s a bit like trying to value a football club. First you have the stadium and facilities (technology and infrastructure). Next you have the coach and players (management and staff). Then you have the supporters (customer order flow). Finally, and perhaps most important of all, there’s the value of the brand itself. All of these factors interact in the mind of a potential bidder to give an overall valuation. Of course the major difference is that, in the case of football, each club can further distinguish itself through its geographic location and the loyalty of its local supporters. While this may once have been the case with the exchanges, technology, demutualisation and MiFID have changed all that.
The second two questions are interlinked. For my part, I think claims that Turquoise is now somehow less relevant are overstated. Its market share has been holding up nicely since the expiration of the liquidity provision agreement earlier this year.
Also, just like the airline business, the low cost operators are required to keep the pressure on the big guys. If Ryanair and Easyjet were to suddenly exit the budget airline business then British Airways would be sure to re-evaluate its price list. At some point, too, the low cost MTFs will need to adjust their pricing models so that they can generate a fairer economic return. It will be an interesting day indeed when an MTF feels confident enough in the liquidity it has captured to start putting its prices up or, at least, withdraw all its special pricing promotions.
So, how many MTFs does it take to keep permanent pressure on the cost of European equities trading? The answer lies in technology and regulation. The cost of operating a matching platform has fallen and will continue to fall. Every time there is a step change in these costs, new venues will likely appear since it’s difficult for the incumbents to continually capture these efficiencies. If subsequent MiFID regulation was to follow the US and adopt a prescriptive approach to best execution, this would go a long way towards breaking down the barriers to entry in this space. Existing venues would be forced to onward route orders to any new venue that published a better price. In this case we might see a perpetual line of new firms ready to jump into the order matching business with the latest low cost, go-faster order matching kit.
The real winners in all this are likely to be those firms that can offer to simplify this growing execution complexity. Baikal, and Turquoise’s TQ-LENS service, are both good examples of this and, of course, all the major brokers make a big play of their ability to navigate effectively through this. Maybe the “how many MTFs” question will be increasingly irrelevant as all players compete to build their own one-stop-shop for order flow, irrespective of whether they are called an exchange, an MTF, a broker or anything else for that matter.