19 November 2006

Sunday Times: Banks plot rival exchange

Stock exchanges have been among the biggest beneficiaries of the booming market, so it is hardly surprising that they have themselves been the subject of long-running global takeover battles.

Last week, the European exchanges faced a new threat when seven investment banks unveiled plans to create their own exchange. The plot, codenamed Project Turquoise, has been formed by Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS, which are responsible for 50% of volumes on the London Stock Exchange (LSE).

The banks claim the charges of all the European exchanges — in particularly the LSE — are too high and since their demands for the exchanges to lower fees have been ignored they have decided to create their own, mutually owned exchange.

The LSE’s share price plummeted nearly 10% on the news, but quickly recovered as commentators — including the LSE — dismissed Project Turquoise as an insubstantial bluff by the banks to get prices lowered. The LSE has pledged to cut costs but is hamstrung because, if it cuts costs, its share price will plummet, leaving it vulnerable to predators. “Anyone can say they’ve set up an exchange,” said one insider. “But the reality is, it’s not the banks’ flows but their clients’, and clients want the best execution. The LSE has the best liquidity and technology around, even if it does cost more.”

There have been previous attempts to set up new exchanges. During the 1990s new electronic trading platforms and websites were springing up constantly. But the banks insist that this time it is different because new regulations will make it possible. Next year, the European Commission is issuing its markets in financial instruments directive, or Mifid, which is the culmination of its efforts to open up competition in exchanges.

Last January, 10 investment banks started work on Project Boat, which aimed to cut the costs of share reporting. Under Mifid, traders will be free to register shares anywhere. Members of Turquoise are now trying to establish a management team. But their biggest challenge is to find a platform provider with technology and services that can compare with those of the LSE.

© Graham Bishop