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June 11, 2012 4:50 pm
Walk into the office of Antonio Zoido, chief executive of the company that runs the Madrid stock exchange, and you step back into a time when business was done at the metronomic pace of a bygone age.
An oil painting of Pedro Sainz de Andino, author of Spain’s first commercial code in 1830, hangs behind his desk. A few floors below, the cavernous trading floor – closed as recently as 2008 – speaks of gentlemanly stock dealing done face to face.
The floor has not been used for trading for years and Bolsas y Mercados Españoles (BME) – which runs the Madrid, Bilbao, Barcelona and Valencia exchanges – has embraced electronic trading along with most bourses around the world.
In the past two months BME has speeded up its trading system by a factor of 10. It has also unveiled plans for “colocation”, where companies place their computers next to an exchange’s trade matching system to cut the time it takes for orders to be done.
Yet Mr Zoido insists that even as BME must offer such services to keep up, he does not want the exchange to be part of a speed “arms race”. Exchanges must offer safe and resilient trading systems, not merely the fastest ones.
“Power and speed without control are useless,” says Mr Zoido as he settles into a sofa in a corner of the office. “Speed doesn’t define a market as a market of quality.”
His comments are a rare voice of caution in the exchange business seemingly obsessed with technology that is driving markets to trade at high speed.
Most exchanges – including BME – are publicly listed. In their hunt for new sources of revenue they are courting high-frequency trading (HFT), which uses computer algorithms to trade in and out of assets in the blink of an eye. With that comes the ability to roll out new services such as colocation, for which exchanges charge extra fees.
However, debate is stirring over whether exchanges risk losing sight of balancing a rush towards new technology with the needs of market participants less interested in speed, such as asset managers placing longer-term bets on company fundamentals.
At the same time there is rising concern that the equity market structure – the physical “ecosystem” of markets – has gone too far in incorporating sophisticated technology that often can go awry.
Last month’s much-vaunted listing of Facebook turned to farce after an automatically cancelled trade disrupted the initial price quoting system on Nasdaq, preventing trading.
That evoked memories of the “flash crash” in US markets two years ago, where the combination of a trading algorithm and the rapid exit of HFTs from the market caused a sudden plunge in the market.
“When was our last [technical] glitch? I can’t remember,” says Mr Zoido, who has been running BME since 1996, making him the longest-serving head of a European exchange. “In general HFT increases activity and is probably good for oiling activity in the market but it incorporates risks that have to be analysed.”
He picks up a framed photograph. Taken in 1999, it shows him standing with a group of leaders of Europe’s main exchanges, including Jean-François Théodore, then chief executive of Euronext.
“We all agreed back then to instigate circuit breakers. The flash crash would have been very difficult to happen here,” Mr Zoido says.
BME’s upgrade comes as it faces competition from alternative trading platforms that rely heavily on HFT participants: BATS-Chi-X Europe, Quote MTF, Equiduct, controlled by Citadel, a US-based trading company and Turquoise, run by the London Stock Exchange. HFT accounts for about 30 per cent of BME’s volume.
Unlike the LSE, Euronext and Deutsche Börse, BME has managed to resist the erosion of its market share partly as local regulations have hindered the implementation of the Markets in Financial Instruments Directive (Mifid), a Brussels rule that broke exchanges’ share trading monopolies across Europe.
Together BME’s rivals account for only about 8 per cent of trading in the benchmark Ibex Spanish index.
The mere mention of those competitors and Mr Zoido bridles, alluding to the industry-wide practice of offering fee rebates to attract traders. “They give you money back, they buy you lunch. Is it fair competition? I don’t think so,” he says. “We have what they don’t have and that is liquidity.”
While his rivals’ trading speeds are faster than BME’s, even with its recent upgrade, Mr Zoido is also critical of Mifid, which he says has created “trading venues competing on speed”.
“This is not the role of exchanges. A basic role of an exchange is that they are able to ‘discover’ a price that is credible for everyone – to say how much Telefónica is worth at a certain moment.
“People believe that price because exchanges have accumulated credibility over many years,” he says. “And this is the crucial thing.”
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