Turquoise Plato Block Discovery

By Robert Barnes, CEO, Turquoise

At a time of global passive indexation and an electronic order book environment that naturally leads to small average trade sizes, investors who wish to outperform benchmarks are calling for innovation in electronic block trading.

To answer this call and still trade in the presence of anticipated MiFID II double volume caps, one needs a respected trading mechanism that can match orders received above 100% of Large In Scale (LIS) thresholds determined per stock by ESMA, the European Securities and Markets Authority.

Designed in Europe and refined in partnership with both the buy-side and sell-side, Turquoise Plato Block Discovery is a Large In Scale (LIS) electronic execution channel that works. Activity continues to grow, setting new records.

Turquoise Plato Block Discovery has registered new records above the volumes of June 2016, the month of the UK Referendum.
Turquoise Plato Block Discovery set a new monthly record by value traded in July 2017 of €5.49 billion, a 3% increase over prior record of €5.33 billion set in June 2017 and more than 9x that of July 2016. Such record activity highlights strong support of the trading community and scalability of Turquoise Plato Block Discovery.
Turquoise Plato Block Discovery has more than two and a half years of empirical data evidencing quality execution featuring: high firm up rates, low reversion, higher average trade sizes in an Open Access multilateral order book mechanism where consistently more than half of value traded – 56% in July 2017 – already is above 100% Large In Scale.

Turquoise Plato Block Discovery: higher trade sizes in an open access multilateral order book mechanism

Turquoise Plato Block Discovery is a broker neutral mechanism for executing anonymous block orders above 100% of LIS thresholds. Today, orders entered are eligible to participate if above 25% LIS. ESMA sets current LIS thresholds relative to an Average Daily Turnover (ADT) metric that segments securities into one of five Bands that set a security’s respective threshold.

Turquoise Plato Block Discovery key observations from Table 2 for the period since September 2016 are that:

• Where traded activity is above LIS, the average trade size is approximately double or more times the LIS threshold across all respective ESMA Bands of liquidity: Average Trade Size Multiple of LIS ranges from 1.9x to 2.8x.
• All of the bands have recorded a maximum successful single trade size well over €1 million, the largest to date being €13.1 million, this was a single trade in Eni, the global energy company with primary listing on Borsa Italiana.
• Turquoise Plato Block Discovery trades for ESMA Band 5 blue chips above ESMA LIS consistently average more than €1 million per trade.

Turquoise Plato Block Discovery trades for ESMA Band 5 blue chips above LIS consistently average more than €1 million per trade and are more than 100x larger than the €10,000 average trade sizes for the same ESMA Band 5 blue chips matching using continuous midpoint mechanisms. This is shown clearly in Figure 2.

Why does this matter?

• Because orders with size above ESMA Large In Scale received by a venue can continue in MiFID II to trade with LIS pre-trade transparency waiver at midpoint and save half the bid offer spread = lower implicit costs.
• Because larger trades that match with minimal market impact and lower implicit costs contribute to long term investment returns.
• Because it shows Turquoise Plato Block Discovery is a working LIS electronic execution channel.

Helping investors get their business done

To visualise what these larger trades look like compared to average trading activity resulting from continuous order book activity, consider the following example of UK-listed company Next plc displayed in Figure 3. The intraday price chart displays time on the x-axis and price on the y-axis with trade prints enriched by trade size. Investors are trading shares of UK company, Next plc, on multiple trading platforms, including the electronic order book of its primary listing destination, London Stock Exchange, and Turquoise. This illustration shows the prices and sizes of trades by investors on 9 March 2017. Turquoise trade prices are similar to those of the primary Stock Exchange, and Turquoise trade sizes serve both the smallest and largest orders through its single connection for straight through processing from trading in London to settlement into Euroclear UK & Ireland. In this example, Turquoise not only enables investors to access a third of the order book value traded that day, Turquoise also matched the very largest order trades of all venues during the day via its award winning electronic block trading innovation Turquoise Plato Block Discovery.

How does Turquoise Plato Block Discovery work?

Members send conditional messages called Block Indications to Turquoise Plato Block Discovery. When there is a potential match between a buyer and a seller, and both are able to get their respective Minimum Execution Size filled, Turquoise Plato Block Discovery sends an automated Order Submission Request (OSR) that requests each member send a Qualifying Block Order into Turquoise Plato Uncross.

Turquoise Plato Block Discovery: low reversion of Turquoise Plato Uncross is positive differentiation

Turquoise Plato Uncross is an innovation that provides randomised uncrossings during the trading day, ideal for larger and less time sensitive passive orders. Turquoise Plato Uncross has been the subject of multiple studies since 2013 by LiquidMetrix, the independent analytics firm that specialises in venue performance metrics and execution quality analysis.

Figure 4 shows that for Turquoise Plato Uncross after one second following execution, the PBBO mid reference price has changed in less than 10% of occasions, as per independent analysis by LiquidMetrix; this compares well with the 50% for continuous dark pools. The insight by LiquidMetrix is that “Turquoise Plato Uncross matching happens at times less correlated with market movements and within the EBBO more readily than continuous dark book executions across all relevant venues”. From an execution point of view, large orders left resting on Turquoise Plato Uncross are less susceptible to gaming or adverse selection that orders left on other continuously matching MTF Dark pools. The proportion of Turquoise Plato Uncross trades executing outside the prevailing EBBO is lower (= better) than continuous dark book trades.”

The value traded via Turquoise Plato Block Discovery in June 2017 was more than 35x the value traded in October 2015, and yet the high quality and low reversion of the Turquoise Plato Uncross™ periodic random matching remains resilient and positively differentiated compared with that of continuous matching dark pools.

Turquoise Plato Block Discovery: high firm up rates and robust reputational scoring

Turquoise Plato Block Discovery has more than two and a half years’ worth of empirical measurements evidencing consistently high firm up rates. These high firm-up rates result from robust automated reputational scoring, which measures the difference between the original block indication and the subsequent firm order.

Since launch, more than 90% of OSRs resulted with firm orders into Turquoise Plato Uncross within the specified time window – under half a second – and with both price and size parameters inside the minimum requirements of the service defined with input from buy-side and sell-side users.

Figure 5 shows that in less than just 9% of OSRs did the respondent fail to come back within the prerequisite core time and size parameters. The key insight is that the vast majority of Turquoise Plato Block Discovery OSRs successfully firm up.

Surveillance of Turquoise activity, including monitoring of price movements ahead of Turquoise Plato Uncross is undertaken by the independent London Stock Exchange Group Surveillance team. Any suspected manipulation of Reference Price will be referred to the UK Securities Regulator, FCA.

A combination of robust automated reputational scoring, independent quantitative analysis evidencing quality of the LIS trading mechanism, and an independent surveillance oversight add to the integrity of Turquoise Plato Bock Discovery for the matching of undisclosed Block Indications that execute in Turquoise Plato Uncross.

Turquoise Plato Block Discovery, designed in Europe and refined in partnership with buy-side and sell-side, has more than two and a half years of empirical evidence and the scale today to be the trading venue of choice for LIS electronic execution.

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