Wednesday, November 15, 2006

Investment banks take on Europe's exchanges

The onset of MiFID in Europe's capital markets and the indecision of Europe's stock exchanges over whom they should merge with appears to be fuelling discontent amongst the world's largest investment banks.

Tired of waiting for consolidation talks between the big three exchanges, the LSE, Euronext and Deutsche Borse to bear fruit, leading investment banks such as Goldman Sachs, UBS, Merrill Lynch and Morgan Stanley have taken matters into their own hands, announcing the formation of a new "high speed" electronic trading system for European shares, which will launch in 2007. The platform will offer trading at tariffs lower than those provided by Europe's leading exchanges.

You don't need to be a rocket scientist to have seen this one coming, although that doesn't seem to have prevented the exchanges from dragging their feet. Many analysts predicted that MiFID, which removes the 'concentration rule' that forced trades in a number of countries to be conducted on national exchanges, would result in alternative trading venues being established by third parties, including investment banks.

Just recently, EASDAQ rose phoenix-like from the ashes with the announcement of a new pan-European exchange Equiduct, also launching next year, leveraging EASDAQ technology, which will provide a single point of connectivity for trading "liquid shares".

Surely the LSE, Deutsche Bourse and Europe's other myriad exchanges can no longer avoid the inevitable; consolidation and tariff reductions? The question is can Europe afford to support all the national exchanges plus new trading facilities that are likely to emerge post-MiFID? And what does this mean in terms of fragmenting liquidity? Presumably, trade flows will eventually gravitate towards those platforms that are not only cheaper, but faster, more cost effective and can provide best execution and a whole raft of services around pre- and post-trade transparency.

But for now poor old Deutsche Borse, which can't seem to find anyone that wants to merge with it, the LSE, and Euronext to a lesser extent as it looks like it will accept the NYSE's bid, are out in the cold in terms of finding suitable bedfellows to shack up with and to help deliver greater economies of scale.

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