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Huw Jones's Trading Places Column June 2015 - IDX Issue: Build It – But Will They Come?

Date 09/06/2015

Being the new kid on the block is not easy but if you've been around some of the other blocks already then you should know a thing or two – a bit like those behind Aquis Exchange and Plato, Europe's trading challengers.

Stephen McGoldrick is project director for Plato, a dark pool venture which hopes to bring the buy and sell sides together on a not-for-profit platform, whose revenues will fund academic studies in how to make trading more efficient for Plato to benefit from.

A string of asset managers, including AXA, JPMorgan and Fidelity, along with banks like Deutsche, Morgan Stanley, Barclays and UBS are supporting the consortium's virtuous circle idea. Plato is now whittling down a handful of potential operational partners to create a utility that offers something ‘better for cheaper’.

"We still hope to launch in the first half of next year," McGoldrick said.

He is drawing on lessons from his involvement in setting up Turquoise, a trading platform the banks used to frighten exchanges into cutting fees, later selling it off to the London Stock Exchange.

"That is an example of a project that took far too long and cost far to much to deliver, but ultimately achieved what it set out to do - creating a competitive landscape in European execution," McGoldrick said.

Dark pools have not been seen in the best light recently with lawmakers on both sides of the Atlantic calling for a crack down to force trading onto lit venues. The European Union will bring in volume caps on dark pool trading in January 2017.

"This is a very difficult business to be in but I believe that Aquis will be a success," said Alastair Haynes, self-styled ‘father of dark pools in Europe’ who heads the new exchange that was launched about a year and a half ago.

As a challenger, he is also drawing on lessons from his time building up ITG's Posit crossing network, and from heading Chi-x, both ventures that took about three years to turn a profit, he said.

"Maybe one of the mistakes I have made is I thought it would take less than three years for Aquis to become profitable, but that is not going to be the case. It would be nice to have moved faster but is the subscription model going to work? Absolutely," Haynes said.

Aquis has a market share of 0.5% in Europe, but much higher in some individual shares. It has 15 customers, including seven of the top 10 European banks. Haynes as has just chalked up the first licence sale agreement for Aquis' technology, though he won't say who.

McGoldrick is also confident there is room for another dark pool in Europe to deal with large-in-scale orders that the big asset managers want to trade with minimum impact.

"I am quite optimistic that the regulator will see us as embracing what they are trying to do with dark trading serving the larger orders," he said. "The problem at the moment is that there is no large-in-scale offering that is broadly trusted and liquid, so we are trying to create that."

Not surprisingly, Haynes and McGoldrick don't see their ventures as stalking horses like Turquoise was in its formative days.

"The motivation here is different. It's about driving up the quality rather than driving down the price," McGoldrick said. "It's about creating this vehicle that can be repurposed and reused for any other collaboration initiative so we don't have to go through a six to nine month setup phase when there is an opportunity to do something together."

Plato will trade shares and ETFs and there is no capacity to look at other asset classes in the near future.

Aquis is one of the potential partners Plato is looking at.

"Plato is raising an issue I think is incredibly important," Haynes said.

The average trade size on dark pools has become smaller than on lit venues. "That is ludicrous. There is something clearly going wrong and Plato is trying to solve that problem. There is a place for large-in-scale orders that need a solution," Haynes said.

It is unclear whether Plato will build a new platform or use someone else's platform or technology, which raises the question whether an Aquis and Plato double-act would be a marriage made in heaven, if it happened?

Who knows, but at least both sides would be going down the aisle with their eyes wide open.