MARKETS - Green Still Means Go

Can the much-hyped Project Turquoise shake up European stock trading?

For a long time there wasn’t much substance to back up the mountains of hype surrounding the November 2006 announcement of the launch of Project Turquoise by a consortium of big brokerage firms planning an electronic trading system to compete with major European exchanges. More than a year later, the initiative is finally gaining momentum. In October, following aborted merger talks with rival Plus Markets Group that delayed Turquoise’s planned fourth-quarter-2007 launch, its backers revealed that they had settled on systems vendor Cinnober Financial Technology to build its trade-matching engine. Eli Lederman, a former Morgan Stanley electronic trading executive who became Turquoise’s CEO on December 1, now says the project is on track to begin trading in autumn 2008.

Problem is, Turquoise has long since sacrificed any chance of gaining an early-mover advantage in Europe. While it has been gearing up, such rivals as Instinet, Investment Technology Group and Plus Markets have launched competing systems and begun taking share from established exchanges. Others, including U.S. trading network operator Nyfix, and Börse Berlin’s Equiduct, are planning to launch platforms in early 2008. All these combatants seek to capitalize on the European Union’s Markets in Financial Instruments Directive, which took effect in November and eliminated so-called concentration rules that favored national stock markets like the London Stock Exchange over pan-European competitors. Turquoise was once all alone; now the field is crowded with rivals.

“No doubt, it would have been better if we were first,” concedes Lederman. “But we looked at the situation and decided it was better to be late than to not go at all.”

Lederman remains confident that Turquoise can still get a leg up on the competition, stressing that its pricing model will attract customers. It plans to charge users for removing liquidity from its market and reward them if they add it — effectively providing rebates to firms that act as market makers by frequently posting price quotes. Superfast systems in the U.S., like BATS Trading and the Nasdaq Stock Market’s Inet, have used this “maker-taker” pricing to attract significant market share. BATS, for example, is just two years old and controls nearly 10 percent of U.S. stock trading. Major European exchanges do not employ such a scheme, making them susceptible to upstarts like Turquoise and Instinet’s Chi-X, which also uses rebate-based pricing.

Turquoise can also draw on its nine big-name backers: Founding members Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs Group, Merrill Lynch & Co., Morgan Stanley and UBS have been joined by Société Générale and BNP Paribas. All, presumably, have an interest in seeding the platform with order flow.

Still, such consortia have proven difficult to manage. A 1999 effort by many of the Turquoise member firms to set up a pan-European bond-trading platform called BrokerTec Global ended three years later with its sale to U.K. interdealer broker ICAP. BrokerTec was announced with much fanfare but took more than a year to get off the ground and lost momentum to rivals.

Lederman won’t specify how Turquoise’s market will work, describing it as a hybrid between a fully transparent order book, in which price quotes are displayed to all market participants, and a so-called dark liquidity pool that keeps customer identities and intentions hidden. But he insists that its Cinnober-built matching engine will bring significant advantages, noting that the Swedish vendor delivered a technology platform on time and on budget last year for Project BOAT, a MiFID-driven OTC trade-reporting system.

Turquoise’s choice of EuroCCP and Citi Global Transaction Services as service providers for clearing, netting and settling trades may also lure users: The lack of a consolidated system for such functions is a source of inefficiency and a big cost disadvantage for European equity markets. EuroCCP, a subsidiary of U.S. central counterparty DTCC, has been in place in London since Nasdaq’s abortive launch of a European ECN in 2004. It is reapplying to the Financial Services Authority for U.K. Recognised Clearing House status and will enable anonymous posttrade processing and risk management.