Tuesday, October 31, 2006

A new 'pan-European exchange' - Is it what the regulators ordered?

Hot off the presses. A rival pan-European exchange has emerged challenging the dominance of national exchanges in securities trading in a post-MiFID world.

As the November 2007 deadline for MiFID implementation looms, it appears that investment firms are tired of letting the exchanges have it all their own way (in the UK investment firms and alternative trading venues are required to report all trades, including off-exchange trades to the London Stock Exchange, a privilege they pay for handsomely.

Some market players, tired of waiting for European exchanges to put aside their national and political differences, have taken the matter into their own hands by establishing a rival platform that will directly compete with Europe's national exchanges.

“MiFID is intended to promote cost effective pan-European trading, not trading in isolated national exchanges," says Bob Fuller, the newly appointed CEO of Equiduct, which aims to provide investment banks and smaller exchanges with a single point of connectivity for trading equities cross-border. Fuller, as you may know, has been outspoken about the market implications of MiFID as a former director of IT Strategy at Dresdner Kleinwort and former co-chair of the MiFID Joint Working Group IT Sub Group.

It appears Fuller and others are adamant that post-MiFID, trading volumes will not automatically flow to the existing national exchanges. In a clear riposte to the major European exchanges currently mired in ongoing consolidation negotiations, Fuller says Equiduct's objective is to achieve a consolidated Europe by connecting not buying everything.

Equiduct bills itself as a truly "pan-European exchange", the idea being that instead of having to connect to all 28 European exchanges or different exchanges to trade Polish, Czech and French securities, brokers can use Equiduct as a single point of connectivity. Equiduct will initially focus on trading 'liquid' shares as defined by the European Commission.

In the run-up to MiFID, there was talk of the major investment firms, particularly those that intended to be 'systematic internalisers' clubbing together to build alternative trading platforms or execution venues, which is pretty much what has happened in the US market.

There is still a chance this may happen. As Richard Balarkas, co-chair of the Global Steering Committee for the FIX Protocol, and managing director, head of Equity Trading Services, Credit Suisse, points out, MiFID is likely to result in liquidity fragmentation in Europe, similar to what has happened in the US.

However, Equiduct is pinning its hopes on the fact that not all investment firms or multilateral trading venues will want to bear the costs of MiFID compliance themselves and will therefore use its platform to provide services such as pre- and post-trade transparency or best execution. In other words, good old 'white labelling'.

Due to go live in the second quarter next year, subject to regulatory approval and customer prepardness, Equiduct's objective is to not only steal the limelight from Europe's stock exchanges, which let's face it, are fully immersed in national and shareholder politics. According to Equiduct, trading equities post-MiFID is all about low-cost and low-latency (less than 10 millisecond turnaround time for accessing pools of liquidity, to be exact).

Interestingly, the platform Equiduct is using to provide pre- and post-trade transparency and best execution for liquid European equities is an upgraded version of the exchange technology platform that was used by NASDAQ Deutschland and NASDAQ Europe, formerly EASDAQ, the troubled pan-European technology exchange which met its demise. Equiduct no doubt will be hoping that it has better success than EASDAQ or NASDAQ Europe in attracting much needed liquidity.

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