24 May 2006

Commission Document on Competition in Securities Trading and Post Trading

The Commissions DG Competition issued a working document on the competition in EU securities trading and posttrading to provide feedback to the industry and to solicit proposals for the elimination of barriers to competition. The paper presents the initial results of this phase of fact-finding starting in July last year and concentrates on cash equities and on trading and post-trading infrastructures, although the issues raised by this paper are also relevant to trading in other asset classes and to the role of sell-side intermediaries.

The report states that access to fungible clearing arrangements is one prerequisite for competition to be effective and therefore must be assured on a non-discriminatory basis. It concludes that vertical integration may result in foreclosure at all levels of the value chain and therefore lead to welfare losses. Whilst there may also be efficiencies, so far the Commission has seen no convincing evidence to substantiate this. The paper suggests that a combination of regulatory measures, appropriate action by the industry and the application of competition rules is likely to be the most efficient way of achieving integrated financial market structures.

As regard to the current competition, the Commission notes that the limited degree of competition in EU securities trading and post trading markets is striking. For subsequent post-trading processing services a number of arrangements between exchanges and clearing and settlement institutions determine the location of post-trading operations. A consequence of this is that the exchange may have the power to allow or disallow competition in post-trading services.

On the issue of cost of trading only few broker-dealers were able to demonstrate an ability to break management accounting data down either by product or by customer. Generally, it is not possible to define an “objective” measure of the cost of trading.

The document also finds that exchanges may be able to protect their business from competition directly or indirectly for example by making access to clearing and settlement arrangements difficult or impossible for a competitor. Where a component of the cost is represented by fixed fees, the means to attribute these to individual trades is relatively arbitrary. A similar problem may arise with regressive fee schedules.

A comparison of all-in fees paid by different user profiles illustrates that at a given exchange, certain profiles incur significantly higher unit costs than others. This is particularly the case for low value trades notwithstanding that the value of the trade does not appear to increase costs for the exchange either in operational or risk terms. Greater transparency would enable customers to make a more informed choice, including of the business case of whether or not to move to a single service provider.

With regard to the final costs to the investor, the Commission believes that additional competition amongst infrastructures and further market integration could also help to break down any rigidities that may exist at the brokerage level. Few brokers have a public price schedule for wholesale trading services. Some even claim to have no pricing policy at all.

Turning to the control over clearing and settlement services, the document concludes that where exchanges control the services offered by post-trading institutions, this may limit the potential for competition to develop in trading and post-trading. The ultimate result of such restrictions could be a series of agreements between the exchange and the CCP which prevented competition and extended beyond what is objectively justified. The result would be less efficient service to users, fewer economies of scale, less innovation and less transparency. Removal of these restrictions would create more favourable conditions for competition as well as for potential consolidation.

Deadline for comments on this paper is 30 June 2006.

Document

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