08 December 2004

Distortion or Distraction: US Restrictions on EU Exchange Trading Screens

The Corporation of London issued its third report written by the London School of Economics examining whether permitting EU exchanges to deploy their equity trading screens in the US would significantly increase the integration of the EU and US equity markets.

The prohibition arouses strong feelings from EU participants that the US appear to be prohibiting EU involvement for protectionist reasons, rather than for valid motives of investor protection.

The report concludes that although introducing EU equity screens in the US would have considerable symbolic value to both parties, the economic and monetary benefits are likely to be small.

US investors have already developed a number of alternative methods for trading EU equity. There is evidence that the transatlantic equity market is already substantially integrated. It has been argued that differences in transaction costs in the EU and US were an indication of market segmentation, and that competition in brokerage between the US and EU was not well developed. Our analysis of transaction costs shows that convergence has largely already occurred, without the availability of EU trading screens.

Overall, the report concludes that the integration of the EU and US capital markets is already well advanced. There is little evidence that substantial benefits would accrue to any party from permitting direct trading on EU exchanges from the US offices of brokers – largely because such trade already takes place through other channels.

Introducing EU screens into the US would not lead to a significant increase in the volume of trading of EU stocks, or a drop in the cost of capital. Arguably, introducing EU screens might push US exchanges towards a faster adoption of electronic trading, to the general benefit of investors in US stocks.

However, US exchanges are already making significant moves in that direction, under pressure from ATSs and regulators, and so it is unlikely that EU exchanges entering their market now would significantly affect this process.

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