25 October 2007

‘Turquoise’ trading platform steps closer to reality

The investment banks behind the rival trading platform ‘Project Turquoise’ have moved closer to seriously challenging Europe's traditional stock exchanges and ultimately undermining the logic behind some of the takeover valuations that has driven consolidation in the sector. 

Last week, the seven investment banks behind the project – which seeks to establish a facility for multilateral trading in shares to circumvent traditional exchanges – drew criticism as talks with prospective merger partner Plus broke down, and detractors questioned whether the project could offer a viable alternative to more traditional exchanges.

But now, the banks – which include Goldman Sachs, UBS and Deutsche Bank – seem to have put the project back on track. French giants Societe General and BNP Paribas have both come on board for the project with three percent stakes and Morgan Stanley’s Eli Lederman has been appointed CEO. 

The addition of the French banks - long rumoured in the market - plugs a major gap in the share trading universe. It also highlights the diversity of emerging challenges to traditional exchanges as BNP Paribas in conjunction with NYSE Euronext and HSBC announced plans yesterday for a new alternative share trading system, Project SmartPool, due to go live by mid-2008.

In a further boost to Turquiose, Cinnober has been chosen as the technology partner for the platform. Cinnober already offers its services to Borsa Italiana and BOAT. 

The technology aspect is vital since one of Turquoise’s key services is a “dark liquidity” function which allows off-exchange trading. This function is understood to demand highly complex technological requirements.

The project to establish an alternative platform for share trading was announced last November and continues to shake up Europe’s fragmented trading landscape. But traditional exchanges have made attempts to undermine its credibility.

Critics say that almost a year after Turquoise was announced, the project had little to show for its efforts – particularly on the eve of the entry into force of key EU legislation which drives the project – MiFID. 

But Turquoise’s announcement today is a strong signal that the project is not faltering, which will delight European regulators. Furthermore, sources stress that parallel talks have been going on with various partners and, despite the breakdown of negotiations with Plus, productive talks with Cinnober have yielded fruit. 

The European Commission is a strong supporter of the project, seeing as it embodies what the EU executive was striving for with its controversial legislation known as MiFID – widely criticised by the financial community as being burdensome and over-intrusive. 

MiFID – EU slang for the Market in Financial Instruments Directive – seeks to introduce a single market and regulatory regime for investment services across the EU. It comes into force this November and is set to reset the plumbing of Europe’s financial markets, responding to changes in the securities markets and, crucially, abolishing the 'concentration rule' where member states could require investment firms to route client orders through regulated exchanges

When MiFID comes into force and Turquoise is up and running, the new players expect to wrestle some market share from existing players like the London Stock Exchange, putting a new complexion on the older exchanges as takeover targets.

There are already others in the trading space making in-roads into traditional exchange’s market shares without the direct aid off MiFID – such as Chi-X – but the legislation itself is expected to accelerate this trend. 

Turquoise plans to be begin participant testing in mid-2008 and hopes to be operational a few months later. 

The participating banks, which between them account for about half of Europe's share trading, are Credit Suisse, Citigroup, Deutsche Bank, Goldman Sachs, Merill Lynch, Morgan Stanley, UBS, BNP Paribas and Societe Generale. 

By Lewis Crofts

© MLex