This Upstart Market Hopes to Grow With `Flash Boys' Strategy

  • Aquis is changing rule book to discourage latency arbitrage
  • The approach resembles U.S. dark pool IEX's speed bump

An upstart stock market wants to bring the fight against the flash boys to Europe.

Aquis Exchange Ltd. has failed to gain traction after more than two years of operation. Now, it’s introducing a rule that will explicitly ban what it considers a predatory strategy known as latency arbitrage -- or using the fastest sources of information on prices to take advantage of traders with slower data feeds.

“They’re not supplying liquidity,” said Alasdair Haynes, the founder of Aquis. “Those types of strategies, we don’t want to see on Aquis.”

The approach resembles the strategy used by IEX Group Inc., the dark pool Michael Lewis lauded in his 2014 book “Flash Boys.” IEX uses a long coil of fiber-optic cable to create a speed bump that discourages latency arbitrage.

Aquis is trying to accomplish the same thing by banning high-frequency traders and other proprietary traders from placing anything other than passive orders. That means they can only supply orders and aren’t allowed to act on another trader’s bid or offer. Although Haynes believes this might cut the company’s market share in the short run, he’s hoping it will ultimately help his business to grow.

“This is absolutely not against HFT,” said Haynes, the former chief executive officer of Chi-X Europe Ltd. “There’s plenty of HFT firms who are using high frequency to supply liquidity. And that’s fantastic.”

Aquis wants to increase its market share to 1.5 percent of European trading, a level it figures could be a tipping point in encouraging more brokers to connect to the platform. It averaged about a 0.6 percent share in the past five days, according to data from Bats Chi-X Europe. IEX is the third-largest dark pool in the U.S., with about 1.7 percent of the nation’s stock trading in January.

Haynes said he has identified several instances of predatory, or toxic, trading. On those occasions, it was followed by a drop in market share. Aquis obtained permission from the Financial Conduct Authority to make the change to its rule book. It also consulted bank dealers and investors.

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