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By Tim Cave, Financial News
July 16, 2015

Mention the Plato Partnership to any senior European equities trader and you’ll likely get one of three responses: a dismissive laugh; a “you know as much as me” shrug of the shoulders; or a contractually-bound “no comment”.

Just over six months after the Plato Partnership first came to light in a Financial Times article, firm details about Europe’s newest equity trading venue have largely been restricted to what was in that original piece: that it will target large-sized stock orders, will be not-for-profit, and any revenues it does generate will fund academic research.

But with many of the project’s key strategic decisions yet to be taken, including who will lead it, who will supply its technology and what its market model will look like, Plato’s early 2016 start date already looks ambitious. What’s more, rival block trading initiatives are beginning to emerge — including some from those trying to bring Plato to life in the first place.

In other words: the project needs to get a move on.

Plato’s apparent lack of progress may be because its shareholder group is particularly unwieldy. It is backed by Morgan Stanley, JP Morgan, Goldman Sachs, UBS, Citigroup, Barclays and Deutsche Bank. From the buyside, Deutsche Asset and Wealth Management, Norges Bank Investment Management, Axa Investment Managers, Union Investment, JP Morgan Asset Management and Fidelity Worldwide Investment are all on board.

In the absence of a full-time CEO, the project is being led by a three-strong executive team headed by Deutsche Bank director Stephen McGoldrick, with a wider steering committee meeting twice every month.

The much speedier progress made by Luminex Analytics and Trading, a US block trading venue backed only by asset managers with a long-term investment horizon including Fidelity and JP Morgan Asset Management, serves as a neat example of the benefits of a shareholder group with a common goal. Luminex appointed a CEO last month and is set to launch a platform for US equities in September.

Even so, the scant details on Plato that have emerged have a slightly clumsy feel, particularly those of the oddly public beauty parade it is undertaking via its website to decide its technology provider. It was a nod to the initiative’s open and transparent ethos, but it is starting to look a little ill-conceived.

The process was announced in March with five potential bidders, and a further two added within a month.

This week, Bats Chi-X Europe, the region’s largest equity trading venue, said it had withdrawn from the selection process. Euronext withdrew in May, the same month Swedish technology provider Cinnober was told it was no longer in consideration. However, all seven firms are still named on Plato’s website. Those still seriously being considered include Aquis Exchange, Nasdaq and the US block trading provider BIDS Trading, people familiar with the situation said. A Plato spokeswoman said the selection process was ongoing, adding it was “making good progress narrowing the field”.

According to people at some of the firms involved in the selection process, Plato’s requirements at times changed from one week to the next, reflecting, they say, an apparent lack of consensus among its backers. Those close to the project strongly refute any major disagreements.

A cynic could argue much of this is sour grapes from firms that had become aware they were being frozen out of the selection process. Or that these firms never had any intention of working with Plato from the outset, but just wanted some intel on the initiative.

What is certain is that the environment into which Plato is launching is becoming more and more competitive. When announcing its withdrawal on Monday, Bats Chi-X Europe made clear its intention to launch a block trading service of its own, and said it would be “unveiling highly competitive initiatives in the coming months”.

It is not alone. BIDS Trading, owned by a consortium of banks and trading firms including some of Plato’s backers, told Financial News last week it had set its sights set on finding a route into Europe, regardless of its ultimate fate in Plato’s beauty parade.

Putting Plato aside for a minute, BIDS and Bats Chi-X Europe are actually the more obvious partners — BIDS has a strong reputation in the US and wants to expand into Europe, while Bats is in need of a block trading solution. There is also an ownership overlap between the firms and conversations on a potential partnership have taken place in recent weeks, though they are in their early stages, people familiar with the situation said.

Turquoise and the buyside-only Liquidnet have also spoken of improving their block offerings in recent months. Even Luminex is open to geographic expansion should it gain traction in the US, people familiar with the situation said.

If anything, this all proves that Plato has a strong business model for the moment. All the more so because it has the backing of some of the world’s biggest fund managers. Institutional investors have long-struggled to buy and sell large blocks of shares amid market fragmentation and the subsequent rise of algorithmic trading, which has decimated order sizes in Europe.

Regulation is also promoting block trading: a revised version of the EU’s Markets in Financial Instruments Directive, coming into effect at the start of 2017, includes limits for the amount of trading that takes place away from exchanges and on dark pools, unless they are deemed “large-in-scale”. The rules will also force bank-owned dark pools to be restructured. Rather than do that, many banks see Plato as a neater alternative, which could also help them meet new best execution requirements under Mifid II.

But the initiative, and others for that matter, are being stymied by regulatory uncertainty; Mifid II’s final text has not been agreed and the devil is always in the detail. Moreover, it is targeting a small piece of the pie: electronic block trading, though highly valued by investors, probably accounts for no more than 3% of total equity trading in Europe, based on the market share of the large-in-scale business facilitated by Liquidnet and ITG Posit.

That pie is likely to grow when Mifid II comes into force, but Plato needs to stop cooling its jets, and fire them up if it plans to take advantage of that. While its aim is to be a trading utility and a contributor to research as well as a trading venue, it needs make sure its core product works first and foremost.

It will be interesting to hear the response you get when you ask about Plato in six months’ time.