Largely thanks to its innovative new solution for on- and off-exchange reporting, pan-European exchange BATS Chi-X Europe has seen its market share balloon in recent months. But, aware of the dangers of complacency, chief operating officer David Howson says that the firm is just as focused on further innovation as on growth.

Regulation and the need for transparency are themes that loom over many parts of the financial services industry. Trading is no exception, and the regulatory drive to bring transparency to off-exchange reporting has shifted the focus of market participants, as they adjust to the new regulatory regime. This regulatory reform, which in Europe comes in the guise of the revised Markets in Financial Instruments Directive, could be taken either as a chance for the industry to grumble about the swathe of reporting requirements or as an opportunity to innovate and come up with a solution that solves the problems of the new environment. 

It is this kind of innovation that David Howson, chief operating officer (COO) at BATS Chi-X Europe, has been working on at the pan-European exchange. BXTR – a solution for on- and off-exchange reporting – is a response to the new regime of post-trade transparency and for over-the-counter (OTC) trades to be reported.

“It is the most market-moving thing we have done,” says Mr Howson.

Opening doors

When the company announced in October 2013 that it was on-boarding customers to BXTR, Citi, Credit Suisse, JPMorgan, Morgan Stanley and UBS were among those in the process of joining the service. By April 2014, €364bn-worth of pan-European OTC trades were reported to BXTR, which at the time was a record. Mr Howson estimates that BXTR’s market share of OTC reporting in the month was 57%, a figure he expects could be more than 70% by the end of the year.

In terms of overall trading of European equities, BATS Chi-X Europe had a market share of 21.4% in April 2014.

This kind of activity, however, is not immediately obvious when walking around its London offices. BATS Chi-X Europe is the largest pan-European equities exchange in terms of traded volume and operates in 15 European markets, but inside it seems like any other company office. There is no massive trading floor, no shouting, in fact, there are not even that many people. There are approximately 60 employees in the office, and the only indication that this is an exchange is a wall of screens, showing trades crossing BATS’s systems and desktops with multiple terminals.

The exchange is still relatively young. It started out as a multilateral trading facility (MTF), to offer a cost-effective alternative to the dominance of the national stock exchanges in Europe. It is now a merged entity, after US-based BATS Global Markets bought Chi-X Europe in 2011, merging it with its own MTF, BATS Europe. Since then, BATS Chi-X Europe has upgraded its regulatory status from MTF to recognised investment exchange (RIE), after gaining approval from the UK’s Financial Conduct Authority in May 2013. 

Mr Howson explains that the main difference with being regulated as an RIE is that the exchange is able to do listings and compete with incumbent exchanges such as the London Stock Exchange. In November 2013, BATS announced it would be listing four exchange-traded funds and there are plans to add more. The RIE status also opens up new segments of the market as more conservative firms, who are only permitted to trade on ‘regulated markets’, are now able to trade on BATS. 

Out of the tunnel

A lot has been achieved since Mr Howson took on the COO position in June 2013. Prior to this role, he was one of the founders of Equiduct, a pan-European trading platform operated by Borse Berlin. Before that, he worked for Reuters Consulting on a number of projects, which included integrating a pan-European equities trading platform for Nasdaq Europe as well as implementing a new trading system for Nasdaq Deutschland. 

He also spent some of his career working in the US, and was in Palo Alto during time of the dot-com boom and the subsequent crash. He warns of 'snowblindness' that can afflict start-up entrepreneurs – a tunnel vision that focuses on the strength of the idea alone, rather than its possible place in the wider market. There is also the danger of innovators working inside large firms and thinking “we’ve got a captive customer base, they’re bound to buy it”, he says.

Being a small company, BATS does not have that luxury – and nor does it want it. “I always think of us as a technology company that solves market problems,” says Mr Howson. “BATS does not try to be too clever. We have smart people solving complex problems but delivering them to the customer in a clear and digestible manner."

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