The Disruptor: Alasdair Haynes, Aquis Exchange

There are numerous reasons why people decide to make a career in the trading world: Some are drawn in by the lure of wealth and glamor sold in titles like Wall Street and Flash Boys (although the sting in the tail of these stories is usually ignored), while others relish the challenge of introducing new ideas and disrupting the established order.

Alasdair Haynes, CEO and founder of London-based Aquis Exchange, falls firmly into the latter category. Throughout a career in the City that started in foreign exchange (FX) at Morgan Grenfell, one of the oldest and most influential UK investment banks prior to its acquisition by Deutsche Bank, to running derivatives for HSBC and UBS, then establishing ITG’s presence in Europe in the mid-1990s and going on to lead the Chi-X exchange as CEO, Haynes, 56, has always looked to bring new ideas to the table.

“I think people have always seen me, even in the early days, as somebody who likes disruption and probably rebelled a bit,” Haynes admits. “I didn’t go to university, and at that time it was quite unusual for somebody to do that.”

That desire to do something different, to shake up the market and get stuck into the challenge, has led to Haynes’ current venture with pan-European equities exchange, Aquis. The exchange was formed in October 2012 from the remains of Chi-X after its acquisition by Bats Global Markets earlier that year. Haynes took a number of former Chi-X staff and aimed to introduce an exchange model that would disrupt the industry, underpinned by its proprietary trading platform.

New Model

“I was just blown away by the growth in industries that have dramatically increased in turnover as a result of subscriptions being introduced, examples like Netflix and Amazon Prime. Yet in financial services I could find nowhere that a subscription model had been introduced.”

The primary objective of Aquis is to break the existing market duopoly—of which Bats Chi-X is often considered one half alongside the London Stock Exchange—and introduce a greater degree of competition to the industry through a subscription pricing model based on messaging traffic.

“If you want competition, you have got to have three or four players; the duopoly has an effect almost as bad as a monopoly,” Haynes says. “We knew there was potential for a business to grow.” London Stock Exchange

While Haynes, due to his previous role at Chi-X, may be accused of creating the very market structure he is now looking to disrupt, the driving force of Aquis as a pan-European multilateral trading facility (MTF) is the creation of a fair and competitive market that features far less toxicity. 

At the heart of this strategy lies its subscription pricing, whereby members are billed solely on the number of messages sent—Aquis currently sees message volumes of 23 million on a daily basis. It is a similar operating model to that of a cellular phone provider, and, in fact, this is where the inspiration for the Aquis model came from, according to Haynes. It was an “epiphany moment” while buying his teenage son a mobile phone that led Haynes to realize the possible new model that lay in front of him.

“I suddenly realized that Vodafone is a utility. Exchanges are also utilities, managing message traffic, but we don’t price on a subscription,” he explains. “I looked up all sorts of things on subscription price in academic papers. I was just blown away by the growth in industries that have dramatically increased in turnover as a result of subscriptions being introduced, examples like Netflix and Amazon Prime. Yet in financial services I could find nowhere that a subscription model had been introduced.”

The idea behind the subscription model is to increase participation from all types of trading firms, meaning that the pay-as-you-go system offers a lower fee for smaller firms that are usually subjected to flat, volume-based fees on other exchanges. Ultimately, Aquis is seeking to redress the balance between Europe and the US in terms of the volume of equity trading taking place in the two regions, while also breaking apart the existing duopolies present in most global markets. It’s an issue that Haynes clearly feels strongly about, and, true to his nature, has approached it from an unconventional angle.

Barriers to Entry

Challenging the status quo is a difficult task, compounded further if an alternative or untried approach is undertaken. Haynes acknowledges that Aquis had a number of challenges to address, starting with getting the exchange off the ground. A few months after Aquis launched, Michael Lewis’ Flash Boys hit the bookshelves and the capital markets went into lockdown as authorities began to poke around many financial institutions.

“We had many banks turn around and say to us that they loved the theory but they had auditors running around their electronic businesses,” Haynes recalls. “Banks were being fined and electronic businesses were being investigated in many ways. Our timing, frankly, was appalling, so it was hard to get the business going. But over time, we got market share up to 0.5 percent of Europe. It was tiny but not insignificant; we were making progress and getting new people on board.”

By this point, Aquis had around 16 market participants on the platform and soon saw aggressive prop trading firms throw themselves into the mix with immediate results, something Haynes and many of the team at Aquis had previously experienced with Chi-X.

While Haynes says that Aquis is often seen to be an “enemy of high-frequency trading,” an accusation he says is “simply not true,” the reality is that “there is a certain type of trading out there that can actually damage liquidity and is not in the benefit of the industry as a whole,” he explains. “We think it creates signaling risk, toxicity, and it’s not in the interests of the long-term investor.”

According to Haynes, the effect of widening spreads and liquidity starting to dry up as a direct result of the aggressive trading style coming to the exchange meant that action had to be taken. Following a long-running discussion with members of the buy side, Aquis considered introducing a speed bump—the addition of artificial latency—similar to that employed by the IEX dark pool in the US, and even received regulatory approval for one. However, due to the market structure in Europe, the idea was deemed unviable, due to upcoming changes to best execution under Mifid II.

Instead, in February this year, Aquis announced what Haynes calls a “radical and definitely controversial decision” to introduce a ban on predatory high-frequency trading on the exchange in the interests of maintaining a “fair and equal” environment. To say the decision was contentious is an understatement, as Haynes says he received hate mail on the day of the announcement.

“I had never received hate mail before,” he says. “Twitter feeds went alive like lights on a Christmas tree, we had huge criticism and I understand that it was a controversial decision. I think at the time people were very heated, very quickly without truly understanding what we were trying to achieve.”

Despite the initial vitriol, Aquis has maintained its position toward aggressive trading and the decision appears to be paying dividends. Since February, Haynes says that liquidity on the exchange has “doubled, then tripled, then quadrupled,” to the point where Aquis now has available liquidity that is second only to national exchanges in many of its regional operations, while market share rose to 1.2 percent by August.

Tech Nuance

Having served as the CEO of both Chi-X Europe and the ITG business that introduced Europe to the American crossing network, Haynes is no stranger to market skepticism and the importance of a sound technology platform. Aquis’ technology stack is underpinned by that experience, and not just from Haynes alone. Half of the current staff at Aquis were involved with Chi-X, in particular on the technology development side.

“When I first looked for investors in Aquis, people were amazed that we were able to get a ready-made team that had a really good proven track record and success, and get them together so quickly,” Haynes recalls. “We have built something very comprehensive and we have had zero seconds of outage since we have been going—there aren’t many platforms, certainly new platforms, that can say that.”

The Aquis platform was initially developed by that former Chi-X team and was thus ready for deployment quicker than many other new entrants’ technology foundations, one of the reasons why Haynes is confident that Aquis will succeed. As a firm with a headcount of 29, Aquis is able to respond faster to market or client needs than its larger counterparts, as evidenced by the ability to build a from-scratch platform while still working from home as the business was being established.

“We’ve built a system that is modular, so it is very expandable,” he says. “It’s a system that handles multiple messages in flight, which is one of the issues for many exchanges, where you have to wait for a message to come back before sending the next one. So we have done something remarkably quickly, but speed is not the important thing. The irony is that the people who really benefit from the high speed are the people that are banned from using our system.”

Haynes singles out the surveillance aspect of the platform, which this year has seen much more attention due to the arrival of the Market Abuse Regulation (MAR) in July, not to mention Mifid II in 2018, as suspicious transaction and order reporting now extends to intentions to manipulate the market. 

Although the platform is proprietary in nature, Haynes has no problem with making the technology available to the rest of the market, including competitor exchanges. In July last year, Aquis licensed its platform to South African venue A2X, which is due to launch in 2017 to provide competition to the Johannesburg Stock Exchange. Under the terms of the deal, Aquis agreed to supply the South African venue with the platform, matching engine, message bus, data services, clearing, surveillance and ancillary support services. 

Haynes hopes that once the system goes live with A2X, it will act as a spur for others to follow suit—exchanges that are currently paying a high price for matching engines and market participants that are seeking to establish their own hosted MTFs or organized trading facilities (OTFs) as Mifid II comes into effect in January 2018. 

No More Waiting

Mifid II has been a looming presence in the capital markets for a number of years, although it’s also one that would be looming that much larger had the European Commission not taken the decision to delay its implementation until the start of 2018. Haynes has not held back from making his views on the delay known, stating that for firms like Aquis that are attempting to introduce change into the market, the implementation of Mifid II is welcome, but adds that regulators will need to get tougher in the future.

“There were things that the regulators, the industry and we all got wrong. In a way, the delay was necessary, but that doesn’t necessarily mean it is good for Aquis. With Mifid II, frankly there should be no excuses,” he says. “This is a long time off. Certainly prioritization, as far as I can see in most firms, is that regulation comes first. That’s what should be going on. The regulator needs to be a Rottweiler, not an Andrex puppy.”

Similarly to the asset management community, changes to rules around algorithm testing is a topic of keen interest under Mifid II for exchanges like Aquis. There is an onus on exchanges to create environments in which algos can be fully tested to ensure compliance with the upcoming changes, although as Haynes points out, testing for disaster-type scenarios is not an exact science and there needs to be a greater focus on real-time surveillance methodologies.

“It is easy to talk around a topic, but when you try to put a set of rules down on paper it’s a very hard task,” he says. “Algo testing is a great example. Nobody in the industry likes what happened to Knight Capital [which lost over $400 million due to trading error], and I think that sadly for them, they are the classic case of what can happen to technology in a very short period of time and how a firm can be seriously damaged.”

Future Ambitions

It’s perhaps unsurprising, given his penchant for challenging himself and others around him, that Haynes is a keen sports fan, with cricket and horse racing featuring highly among his passions outside the financial services world. A former owner of horses, he describes the racecourse as a “great equalizer” and has already thought out his plan of action when it comes to leave the capital markets behind.

“When I eventually retire I will join the Barmy Army,” he claims, referring to the 3,000-strong organization that travels around the globe supporting the English cricket team. “I can’t think of anything more enjoyable than spending 25 days watching cricket, although most people will think I am mad.”

But for now, he’s focused entirely on Aquis. While the exchange’s market share currently sits at 1.2 percent, the aim is to boost that figure to around 4 percent over the next 12 months and remain open to the idea of expanding the exchange’s scope beyond a single asset class. Haynes is also keen to take Aquis beyond Europe.

“I would like to remain independent. I see Aquis as a major player in the global market space and that doesn’t just mean equities. I think our model is going to have a fundamental change on this industry,” he states.  “We can absolutely globalize this business and that is what keeps me coming into the office at some ungodly hour in the morning, because that should excite the hell out of anybody.” 

Fundamental Data

Alasdair Haynes

Name: Alasdair Haynes

Age: 56

Title: CEO and founder, Aquis Exchange

Hometown: London/South East England

Education: Wellington College

Hobbies: Horse racing, tennis, cricket, spending time with family, charity (Children in Crisis trustee, chairman December 2012—January 2016)

Biggest Career Achievement: Introducing crossing networks/dark pools to Europe with ITG