Download Banks and European exchanges seek to profit from Mifid Luke Jeffs

Banks and European exchanges seek to profit from Mifid Luke Jeffs
30 Oct 2006
Euronext moves to offset potential losses from the new directive
With the markets in financial instruments directive set to become law in a
year, at least one of Europe’s stock exchanges has decided if you can’t beat
them, join ’em.
Euronext last week said it was in talks with investment banks over the development of a system that
would enable them to execute trades internally after the introduction of Mifid, the new European trading
rule book.
The move is seen by exchange sources as a pre-emptive measure to offset potential revenue losses
after the rules that force brokers to match trades through exchanges are outlawed on November 1,
2007. Euronext’s move is the latest sign that institutions are taking the implications of the rules
seriously.
Some organisations are so advanced in their Mifid preparations that they are shifting their focus from
compliance to profit-making after its introduction, according to sources and IT consultancy LogicaCMG,
which this month published a paper entitled Mifid – an opportunity to profit.
Lode Snykers, a managing director at LogicaCMG, said: “Mifid is much more than regulatory obligation,
it is just like all previous legislation – an opportunity for growth and profit. The smartest and strongest
can profit from Mifid.”
Research by consultancy Accenture found that 14% of organisations regarded Mifid as a way to
capitalise from its outset. Anthony Kirby, director of financial services, said Mifid had elicited two
responses. “There are those taking a defensive, wait-and-see attitude and those who view Mifid as
transformational and are developing value-added services for their clients,” he said.
Chris Pickles, manager of industry relations at BT Radianz, a trading network, has noted the changing
attitudes to Mifid. “Firms have passed through the gamut of reactions – from denial to acceptance to fear
to weighing up the commercial opportunities.”
PJ di Giammarino, chief executive of JWG-IT, a Mifid consultancy, agreed the tone had changed.
“Organisations are waking up to a big change and moving quickly through the change lifecycle,
particularly in London. We are seeing some of the early adopters behaving differently than they were six
months ago,” he said.
He cited the examples of Project Boat, the trade reporting service launched by nine investment banks
last month, and Euronext’s recent venture.
Unlike Euronext, which claimed its talks with banks had nothing to do with potential revenue losses after
Mifid, Kevin Bourne, head of global equities execution at HSBC in the UK, said European equity
exchanges would be affected. “The main markets will offer securities listed on other exchanges, which
will introduce intensive price compression and force them to think about their underlying execution
models,” he said.
Pickles said Euronext was right and other exchanges should provide and host trade-matching
technology for investment banks, rather than focusing solely on trading liquidity.
For their part, the ability to match trades internally instead of through an exchange interests investment
banks and brokers because it potentially lowers their trading costs. Di Giammarino said: “The question
for investment banks is to what extent do they want to challenge the infrastructure players? Put another
way, how much do they want to manage infrastructure themselves?”
Most large investment banks have not said whether they would apply to be registered as a systematic
internaliser but Kirby said there would only be a handful. “There are no more than 15 investment banks
that have the critical mass and liquidity, and are geared up to be categorised as systematic
internalisers,” he said.
But the barriers to entry are coming down as technology costs fall, said di Giammarino. “In terms of
competing with the exchanges or data vendors, the question was who was going to build the systems?
But if Euronext or Project Boat is doing that, institutions are not faced with that overhead.
“If the platforms are available and the barriers to changing existing business models are lowering, what
is to stop people thinking more creatively?”
Graham Bishop, a banking consultant and author of the LogicaCMG report, said Mifid had the potential
to shift the balance of power between the sellside and exchanges. “For five or 10 leading investment
banks, there is the opportunity to offer a portfolio of trade types across each national exchange, which
may lead to private, vertically integrated exchanges controlling large-cap trading, while the exchanges
focus on derivatives, and settlement and small-cap trading is spun off,” he said.
Mifid’s aim is to ensure the best deal for investors but the impact of the new rule book on investment
managers is often overlooked.
The commercial opportunities presented to fund managers by Mifid are not as great as those open to
the sellside, particularly when compared with the onerous reporting and client re-classification
requirements for asset managers. But the buyside is moving now, according to di Giammarino.
Kirby believes more exchanges, sellside institutions and fund managers will start to focus on profitmaking under Mifid over the next year as their compliance with the rules is established and they try to
claw back some of their investment.