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A Time for Anticipation |  For Front Office, More of the Same Means More $$$$ |  MiFID Brings New Trading, Data Management Opportunities |  Easdaq Makes a Comeback as Equiduct |  Clearing Firms Extend Their Outsourcing Businesses | 

MiFID Brings New Trading, Data Management Opportunities

January 1, 2007
By Chris Kentouris

Judith Hardt, secretary general of the Federation of European Stock Exchanges, says that the jockeying for position among European exchanges and their increasingly feisty member firms is "like playing chess with all the pieces moving at the same time."

The game is being redefined by the Markets in Financial Instruments Directive (MiFID), which requires that firms offer their clients best execution-a concept that incorporates not only price, but also speed, certainty and costs of clearing and settlement. The directive eliminates the concentration rule that forces trades in a number of European countries to be conducted on national exchanges and gives rise to a new category of players called systematic internalizers, which can match trades on their own books.

The European Commission sees MiFID as central to its efforts to break down barriers to cross-border securities trading and usher in a single European capital market. Until recently, "much fanfare has been made about the mega costs of complying with the directive," says Graham Bishop, a London consultant specializing in European Union legislation. But Bishop, who recently wrote a report commissioned by consulting firm LogicaCMG on business opportunities related to MiFID, believes that its provisions create an attractive opening for "new high-speed trading platforms."

As the November 2007 deadline for MiFID implementation looms for the 25 European Union member states and three nonmembers, investment firms are showing a willingness to challenge the dominance of established exchanges. Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs Group, Merrill Lynch & Co., Morgan Stanley and UBS-under the banner of Project Turquoise-in November announced plans to form a joint, pan-European trading platform. Together, the seven banks account for more than 50 percent of share-trading volumes on the London Stock Exchange (LSE). All are also backers of an alternative trade reporting facility that came together this past summer, code-named Project Boat.

There's more: Chi-X, a multilateral trading facility built by global agency brokerage Instinet, has introduced trading in U.K., German and Dutch equities. Equiduct, led by former Dresdner Kleinwort Wasserstein director of IT strategy Robert Fuller, is using the technology of the defunct Easdaq and Nasdaq Europe to create a new electronic, pan-European trading platform, planned to launch in the second quarter of 2007.

These initiatives come as the major European exchanges, not least the LSE, are fielding or making takeover bids and facing competitive pressures that are exacerbated by the new entrants. The track record of upstart trading systems from the dot-com era is spotty-Jiway, a joint venture of Morgan Stanley and Stockholm's OMX, failed, and London's Tradepoint was absorbed into the SWX Group's virt-x-but times have changed, the memberships are resolute and the exchanges have little choice but to take notice.

Competitive Response

"Our investment in technology and trading services continues to reduce the cost of trading markedly for all investors," LSE spokesperson John Wallace said in reaction to Project Turquoise. "Since the 1997 introduction of [LSE trading platform] Sets, the average weighted spread of shares in the FTSE 100 has been reduced from 96 basis points to 14. The London market is already open to competition with the existence of various trading venues."