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November 6, 2012 8:02 pm
BATS Chi-X Europe, Europe’s largest share trading platform, is in talks with UK regulators about securing an exchange licence in a move that could open the door to trading on the market on behalf of retail investors.
The trading platform has pursued a pledge made in a filing to US regulators when its Kansas-based parent BATS Global Markets prepared to list this year.
A high-profile technology glitch forced BATS to pull its flotation, but its European arm has been in dialogue with the UK’s Financial Services Authority since May and a draft proposal is with the FSA, say two people familiar with the situation. BATS Chi-X declined to comment.
Approval would open up new fronts for BATS as it seeks to recover some of the market share in FTSE 100 stocks it has lost to the London Stock Exchange in recent months. A year ago, BATS Chi-X had a market share of about 40 per cent but that has fallen to about 30 per cent, according to BATS’ own data.
A Regulated Investment Exchange licence – of which there are only five – would allow BATS to offer trading in derivatives contracts, an area it has targeted in the past, and listings in competition with the LSE.
“This seems like a natural progression for the company to further legitimise its business,” said Peter Lenardos, an analyst at RBC Capital Markets
But it would also potentially open the exchange to retail investors. European markets regulation was introduced five years ago, known as Mifid, with the vision of lowering transaction costs across Europe’s capital markets for ordinary investors.
To spur competition, the directive required brokers to ensure they were achieving “best execution” when they carried out a trade for a client, which allowed other trading platforms to challenge the exchanges.
Best execution means not only getting the best price for a share for your client, but ensuring that the trade is cleared and settled in the most efficient and cost-effective way.
But the best execution policies offered by many retail stockbrokers do not reflect the market share carved out by BATS Chi-X Europe. Some brokers are only mandated to trade on an exchange but BATS is legally designated as a multilateral trading facility (MTF) under European rules. Others allow alternative trading venues but do not name any venues.
For example, the best execution policy at Barclays Stockbrokers, one of the UK’s largest brokers, states: “We may execute your orders off-exchange, where this is in your interest, but we place greatest reliance on major stock exchanges such as the London and New York Stock Exchange and Euronext.”
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