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MiFID Brings New Trading, Data Management Opportunities

January 1, 2007
By Chris Kentouris

Paris-based Euronext, which has a merger agreement in place with NYSE Group, parent of the New York Stock Exchange, has said that it expects to cut its fees by upward of 15 percent after the merger, while Frankfurt's Deutsche Borse said it would not be "greatly affected by the competitor."

"It was inevitable that banks would try to create connectivity with their peers in these types of projects, but what is remarkable is how quickly they were organized before MiFID takes effect," says Ralph Silva, senior analyst in the Paris office of research firm TowerGroup.

The question now: Can Europe afford to support all the national exchanges plus new trading facilities that are likely to emerge post-MiFID? Presumably, trade flows will gravitate toward venues that are not only cheaper, but also faster and more cost-effective, facilitating best execution and providing an array of services around pre- and post-trade transparency.

"There could be some consolidation among exchanges, or they could be forced to offer some new services," says David Brown, an associate partner in the London office of consulting firm

Adds P.J. Di Giammarino, chief executive of JWG-IT, a London-based capital markets think tank specializing in MiFID preparations, "The [exchanges] have a distinct advantage over the new ventures, and a lot will depend on how much they will reduce their fees. It won't be easy for anyone to shake their dominance, but brokers are certainly having a lot more leverage than they did in the past."

Bishop projects three possible scenarios for how the European landscape will shake out under MiFID: retention of the status quo, in which exchanges are the dominant providers of trading liquidity; the rise of a few systematic internalizers; or the coexistence of a few exchanges and systematic internalizers.

Observers agree, however, that aside from the merits of systematic internalization, some of the largest investment banks could easily offer their smaller peers a soup-to-nuts or à la carte menu of trading and data-dissemination and -storage offerings to assist in MiFID compliance. Such services might be particularly useful to private banks, retail broker-dealers and even fund managers looking to off-load their compliance with MiFID to their executing broker-dealers.

MiFID is also shaking up the status quo in market data. The directive obligates all firms to report post-trade data to any public arena-not only to their local exchange-within three minutes of a transaction's completion and to store data on competing prices to prove best execution. Systematic internalizers must also publish pre-trade quotes for "normal size" orders in a public venue in close to real time. In doing so, firms can charge for data dissemination at a reasonable commercial rate.

Data Costs

The seven investment banks in Project Turquoise plus ABN Amro and HSBC signed the letter of intent to create the Project Boat trade capture and market data dissemination platform by August 2007. "The opportunity for investment banks to capture, pool and disseminate their own market data has been there for a very long time," says Andrew Miller, managing director of Arcontech, a London-based market-data software specialist. "MiFID has just become a catalyst for brokerages to [develop] their own market data communities."