Exchanging places

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Banks' plans to set up their own equity platform should be good news for technologists. It may prove less fortuitous for equities traders and employees of the London Stock Exchange.

Earlier this week Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch and Morgan Stanley announced plans to form a new European equity trading platform.

This isn't the first time banks have tried to go it alone - the latest venture is reminiscent of the Tradepoint platform, which was launched in 2000 and fell short of its trading targets before being absorbed by the Swiss Stock Exchange in 2003. This time, however, consultants say the new platform is likely to last.

"The established exchanges have seen a massive increase in volume and as a result their income looks huge," says Stephen Kingsley, of BearingPoint, a consultancy firm. "Banks are looking at this and saying they're not doing anything to earn this extra money, so why not do something ourselves?"

MiFID makes the difference

The crucial factor in the equation this time around, says Kingsley, is the Markets in Financial Instruments Directive (MiFID), which is due to come into effect in June 2007.

The legislation will allow banks to make their own markets in European stocks without having to go through exchanges. The practice is already common in the London over the counter derivatives (OTC) sector, but is almost unheard of for regulatory reasons in continental Europe. MiFID will also allow clients to choose where trades are cleared and settled, without being tied to exchanges' own clearing and settlements systems.

Technologists come out on top

Consultants say banks' resultant rush to develop off-exchange platforms will hasten the shift towards electronic trading. "In a world of turmoil there will be winners and losers," says Graham Bishop, a MiFID-specialist consultant. "This is bound to give a push towards electronic trading and to increase margin compression."

David Lascelles, co-director of the Centre for the Study of Financial Innovation, agrees. "All of this [off-exchange trading] will be based on technological platforms, which creates huge demand for people who understand how to set up these trading systems and the back office behind them."

The implications for equities traders are less clear cut, says Lascelles. On one hand, reduced trading costs could encourage higher volumes, leading to increased profitability. On the other, he says pay and jobs may suffer: "Pricing and efficiency will be absolutely key to new platforms' success. That may result in increased automation and a squeeze on staffing costs."

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