In the four years since its launch in March 2007, London-based stock exchange Chi-X Europe has catapulted to the top of the market-share rankings in pan-European equity trading, challenging the traditional incumbent exchanges to keep pace with its blistering execution speeds and ultralow pricing. Now the alternative trading venue, led by CEO Alasdair Haynes, is turning up the competitive pressure by introducing a series of pan-European equity indexes, known as the Chi-X Europe Russell Indexes — or Cheri, for short — with the help of U.S. index provider Russell Indexes, part of Seattle-based financial services firm Russell Investments.
The move marks the Chi-X Europe’s latest effort to bite into the business models of the incumbent exchanges, many of which still hold commanding and lucrative positions as providers of market data. Having gained leading market share in pan-European equity trading, Chi-X Europe is now seeking to translate its newfound clout into better index tools for tracking and benchmarking investment performance. For the incumbent exchanges, however, the competitive threat goes beyond the reality of Chi-X Europe’s move into data provision: The creation of its new series of indexes signals the company’s ambitious future plans to diversify into trading index-related derivatives products — still one of the most profitable, heavily concentrated segments of the exchange industry.
“We’ve been hugely successful in pan-European equity trading,” says Guy Simpkin, a member of the business development team at Chi-X Europe, “so the obvious thing to do, as an exchange, is to take the assets that we’ve got and — with the support of our client base — leverage those assets in the derivatives space.”
With the launch of its indexes, Chi-X Europe is now going head-to-head with established index and data providers like the London-based FTSE Group and Zurich-based Stoxx. Winning business from such established brands won’t be easy, but Simpkin is convinced that Chi-X Europe and Russell Indexes will find a following. The flagship index of the new series, for example, is the Cheri PanEurope, which has been designed to split the difference between the Stoxx Europe 600 index — a broadly diversified index that contains many less-liquid securities — and the FTSE 100 index, which focuses solely on the largest blue-chip companies traded on the London Stock Exchange. The Cheri PanEurope, by contrast, encompasses a broad range of large-capitalization stocks from developed European markets – 216 securities across 14 countries and five currencies drawn from the Russell 1000 universe of large-cap stocks. “We simply think we’ve designed a better proxy for Europe,” Simpkin says.
Given the pan-European liquidity that Chi-X Europe is able to command, all 216 stocks represented by its Cheri PanEurope index are already actively traded on the Chi-X platform, so their prices can be sourced from a single exchange. As Chi-X Europe begins to develop its derivatives business, Simpkin sees an advantage for clients in being able to colocate their cash equity trades with their derivative trades. But even he admits that, while the company may be able to create a compelling suite of products, convincing clients to make use of them will take time. No one expects the growth of Chi-X Europe’s new business to resemble the astonishing trajectory of its market share in equities. But Chi-X Europe, by moving into data-provision — and someday soon, derivatives — is clearly opening a new front in its ongoing battle with the incumbents.
