 Baikal MTF, supported by Lehman, will battle new entrants
The London Stock Exchange is to create a pan-European multilateral trading facility (MTF), with the assistance of Lehman Brothers, for the execution of non-displayed trades. The Baikal joint venture platform, named after the largest lake in the world in Russia, is due to launch in Q1 2009, subject to regulatory approval, and will combine a dark pool of liquidity with sophisticated algorithmic trading functionality
Baikal will offer access to 14 European countries, with smart order routing capabilities to at least 22 trading venues across the continent. The platform will offer users liquidity seeking algo trading strategies that can be tailored to suit traders risk profiles and a pan-European clearing and settlement system with aggregated trade booking. According to the LSE, anti-gaming and market surveillance tools will ensure the safe and secure execution of equity trades, and real-time post-trade reporting will be available via the LSE’s Infolect feed. A strategic advisory committee and working groups, consisting of various market participants, will be up and running from Q3 2008, to try and ensure that Baikal delivers innovative solutions and a reliable service to all types of players in the market place.
The joint venture will be chaired by the LSE’s chief executive, Clara Furse, and staffed, at least initially, by various employees from the exchange and from Lehman Brothers. It will operate as an independent, standalone business however, and other companies can buy into the platform. Both partners are actively encouraging participation from the buy- and sell-side but it is a fact that Lehman Brothers is unfortunately one of the few major investment banks that hasn’t already committed to backing the Turquoise platform, which is due to launch in September. Persuading others to join Baikal may not be easy with the number of alternative venues that are already out there and some fear the LSE may have left its move too late.
The upbeat Furse is not daunted though and believes: “Baikal provides an exciting opportunity for the market to transact certain types of business in European equities with the confidence of total pre-trade anonymity. We welcome the participation of other members of the sell-side, as well as the buy-side community, in making Baikal a success and are confident it will bring down the cost of investing in European equities,” she added.
Her confidence was supported by Jeremy Isaacs, chief executive officer of Lehman Brothers, EMEA, who said the firm is: “committed to providing state-of-the-art solutions to meet the increasingly sophisticated needs of our clients. We were the first bank in Europe to offer direct access to our own dark liquidity pool. Baikal represents a substantial evolutionary step in providing market participants with the ability to access and utilise dark liquidity efficiently in European equities, and we anticipate that it will become the premier platform for addressing the growing complexities of the market place.”
The new launch will enter a crowded market place and battle a plethora of new execution venues, such as Chi-X and the soon-to-launch Turquoise platform, which is supported by Citi, BNP Paribas, Goldman Sachs, UBS and five other banks, and has its own dark pool of liquidity. Other specialists in non-displayed trading, such as NYFIX Euro Millennium, ITG and BATS, are also entering the market place in the wake of the EU’s Markets in Financial Instruments Directive (MiFID), which has eliminated the concentration rule and seeks to establish a harmonised European-wide trading environment, triggering a scramble for market share.
Without Baikal, which offers the LSE the chance to capture some of this rapidly growing dark source of liquidity, the London exchange risked relying on its displayed order book for growth – an unwise move in the current conditions where increasing automation and algorithmic programmes are driving the need for anonymity.
Other traditional exchanges are also making moves to try and counter some of the new execution venues, with their ‘dark’ functionality, which are coming to the market. NYSE Euronext, for example, is partnering with HSBC and BNP Paribas to form the Smartpool electronic block trading platform, while SWX Europe (formerly virt-x and now a wholly owned subsidiary of the Swiss stock exchange) is working with NYFIX’s Euro Millennium pool to offer a branded non-displayed service for Swiss blue chip equities. The market shake-up initiated by MiFID last year continues to play out and it will be interesting to see who are the winners and losers in this battle for volume in the years ahead.
• For more information about dark pools of liquidity please see FST’s recent feature article here – http://www.fstech.co.uk/cover-story.htm
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