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A View from Turquoise

Thanks to Eli Lederman, CEO of Turquoise, for responding to my recent entry (The Big Bang Theory). With his permission I have included his comments below:

“A little confused…Turquoise cut its fees because we can: we operate a diversified (and diversifying) business with an integrated lit and dark market. Seems to be what, in the next paragraph, you characterize as “the other end of the spectrum” with NYSE Euronext Arca Octopus MTF. Our MTF is different from Bats and Chi-X. They only have one business and, I agree, it is getting extremely competitive. Since our higher margin dark service requires strength in the visible, we are going to be aggressive into their core/only domain.

MTF as a term applies more generally than some in the market perceive, i.e. only smaller and smaller orders going off at super high frequency. The term is a big tent that also covers innovative, differentiated business models. Our success in the visible and dark part of our MTF will also be important to our forthcoming liquidity aggregation service. Being competitive in the visible is a ticket to participate in the good businesses that trading has begun to move towards.

We’re fortunate, compared to some of our competitors, that we’re not constrained by old technology (yes, 2 years even is old, now), and are set up to take advantage of the movement of liquidity that’s now underway.”

It seems like there are a couple of key themes here. The first is that diversity is central to creating a truly sustainable venue (something I have mentioned a few times already). The second is even more valid – that the term MTF has become so ubiquitous as to be almost meaningless because, as Eli points out, it is now used to cover every sort of alternative trading platform including lit and dark venues, and even the brokers’ own dark pools. The problem is that each has to conform to a separate regulatory regime according to how it is classified by MiFID. The effect of this is to artificially preference one venue or another according to its classification under the rules rather than the types of order flow it attracts. Perhaps what the next round of MiFID regulation needs to do is focus on classifying trading behaviour (e.g. lit/dark, hybrid, passive, aggressive etc) rather than trying to differentiate the venues themselves. This would seem to be the best way of creating a level playing field as the rules would then be the same for everyone.

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