Banks now take on bourses on their home turf

LONDON/BRUSSELS: Citigroup, Goldman Sachs Group and at least a dozen more banks gain new powers today to challenge the dominance of London Stock Exchange and Deutsche Boerse, under Europe’s biggest revision of securities laws.

The Markets in Financial Instruments Directive takes effect after seven years of planning, and opens up competition between exchanges and alternative trading platforms across the 27-nation European Union.

“Mifid opens the door for competition and that always stirs things up,” said Will Easley, who traded equity options on the floor of the Paris Bourse from 1987 to 1995 and is now vice-chairman of the all-electronic Boston Options Exchange.

Investment banks plan to invade the turf of LSE, the dominant UK market; Deutsche Boerse, where about 98% of exchange trading in German stocks takes place; and NYSE Euronext, whose markets include the historical monopoly for French shares. New York-based Citigroup, the biggest US bank, and Goldman, the most profitable securities firm, are part of a group of nine companies that plan to start a facility called Turquoise next year.

Borsa Italiana of Italy, bought by the LSE in June, and Bolsas y Mercados Espanoles of Spain are also being thrown open to competition for executing and reporting transactions as well as clearing and settlement. At stake is billions of dollars in fees for handling stocks across Europe with a market value of $15.4 trillion. The LSE, Deutsche Boerse and Euronext made about $864 million last year by charging investors to trade stocks on their markets.

Another group of banks will challenge the exchanges in reporting off-exchange trades, through a venture named BOAT. Mifid requires disclosure of all transactions within three minutes, with a delay permitted for certain block trades where revealing the position would cause tie-ups. The EU passed the law in 2004, replacing the 1993 Investment Services Directive, as part of a plan to unite the region’s financial markets and cut the cost of trading.

The law also sets common rules for consumer protection, including that firms must assess the suitability of the investments they offer to the needs of each client, and strictures against conflicts of interest. Integrating financial markets can boost gross domestic product by 1.1% over time, according to figures cited by the commission. The overhaul may cut the cost of raising equity capital by 0.5%, and debt by 0.4%.

“It will lead to lower cost and higher volume,” said Jean-Baptiste de Franssu, chief executive officer of Invesco’s European business. “Investors, at the end of the day, are going to feel better under Mifid.” Mifid requires brokers to seek the best way to execute orders.

That includes transaction fees, and European brokers also can consider speed and certainty of execution if clients demand. Citigroup in Europe responded with new technology. From November 1, every trade made through the bank, either on its own account or for customers, will use so-called Smart Order Routing technology to scour different markets in milliseconds to decide which one is best.

In the past, Citigroup’s London traders would look at prices quoted on primary exchanges. Employees in the bank’s glass tower by the River Thames can now seek prices for BP shares at three different European bourses. Those include Chi-X Europe, which started in European stocks in March, and Virt-x, a London-based unit of the Swiss stock exchange, in addition to LSE, which has been around since the American War of Independence.

“A big part of Mifid is introducing competition between venues,” said Toby Bayliss, Citigroup’s head of electronic execution sales, who oversees the introduction of the new technology. “Six months down the road customers will look at how they access the markets and the cost of trading and ask their brokers some questions.”