Project Turquoise, the pan-European equity trading operation which was established last year by seven investment banks (Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group Inc., Merrill Lynch & Co Inc., Morgan Stanley, and UBS AG), with the aim of taking advantage of the European Union’s Markets in Financial Instruments Directive (MiFID), is increasingly in the financial press.
Part of the rationale behind Project Turquoise is that MiFID, which came into force on 1 November 2007, allows the creation of a multi-trading facility across Europe, as domestic trades will no longer need to be reported on domestic exchanges. This will in effect end the domestic monopolies enjoyed by the likes of the London Stock Exchange (LSE) in the United Kingdom. Project Turquoise is also seen as necessary by the banks in the consortium as MiFID also requires brokers to give “best execution” to their clients, which means that they have to trade on the exchange that offers the best price for the size of the trade. By setting up their own trading platform, the consortium banks will make huge savings on the fees they have been paying to the European exchange, with insiders suggesting a 50% reduction in trading costs, which will allow them to give their clients best execution.
Despite Project Turquoise being dubbed “Project Tortoise” in the business press due to its launch being delayed until Autumn 2008, there has been a recent flurry of announcements: including board-level appointments; BNP Paribas SA and Societe Generale SA joining the Project; the rebranding as Turquoise; and, following the collapse of reverse takeover talks with PLUS Markets, Sweden-based Cinnober has been chosen as the technology provider for the Project. Recent appointments in February 2008 include Ian Werner, former manager of the compliance and investigations team at the LSE.
To understand the potential impact of Turquoise, you need to look no further than the example of BATS Trading. BATS Trading, a platform established by trading organisations in the United States, now accounts for 9% of the US share trading market, and although only created in 2005 is the third largest share trading platform in the US. The entrance of this new player into the US market has sparked a price war among the exchanges, and the arrival of Turquoise can be expected to have the same effect in Europe. Mr Lederman, CEO of Turquoise, was recently quoted by CNBC as saying that it was “eminently feasible” for Turquoise to achieve a 20-30% share of the European share trading market.
There may be stiff competition as BATS Trading has indicated that it might establish a European division, and most of the backers of Turquoise have recently invested in Chi-X, a pan-European electronic exchange which unlike Turquoise is already up and running. Expect to be hearing more about Turquoise and the other emerging exchanges over the next year.