Turquoise CEO warns of sponsored access risks
Sponsored access schemes that allow buy-side firms to trade on execution venues under the name of a broker, introduce unacceptable risks for brokers and unclear lines of responsibility, according to Eli Lederman, CEO of pan-European multilateral trading facility Turquoise.
Speaking on a panel at Wednesday’s European Market Liquidity Conference hosted in London by the Securities Industry and Financial Markets Association, Lederman expressed surprise at the UK Financial Services Authority’s acceptance of a system that effectively allows buy-side traders direct membership to trading venues in another firm’s name. “There are risks introduced by this model,” he said. “There are various efforts to mitigate these risks, but it is an unusual thing to be doing in 2009.”
Peter Randall, CEO of fellow MTF Chi-X, which was granted FSA approval for its sponsored access service last October, said brokers can implement client rules into the access gateway of Chi-X’s trading platform. “If, for example, broker-dealer A has a rule that client B can only trade up to EUR 100 million of FTSE names, that rule can be configured into the gateway,” he said. “It is very straightforward.”
However, an audience member from a large sell-side firm pointed out that while it is possible for brokers to stipulate the rules and validations that apply in the gateway to an MTF, it is up to the platform in question to ensure they are implemented. Under sponsored access, brokers are essentially liable for their clients’ actions on the venue, but, the audience member argued, it is so far unclear who would be liable if an MTF failed to implement a broker’s rules correctly.
“The liabilities in these relationships to my knowledge have never been tested,” added Lederman. “Sponsored access is a facility that is of interest to exactly the kind of firms that, if there were significant systems issues, could have a destabilising effect on the entire marketplace.”
Pan-European MTF BATS Europe and the London Stock Exchange both launched their sponsored access services in January.