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15 August 2006

The Independent: Investment banks team up over plan to bypass LSE

Leading investment banks are co-operating on plans to build a new system for reporting equity trades that would bypass the London Stock Exchange and other European bourses. Ten banks, including Merrill Lynch, Citigroup, Deutsche Bank and UBS, are working together on the cryptically code-named Project Boat. They are looking to take advantage of changes to the rules governing the reporting of trades due to come into force next year under the EU market in financial instruments directive.

At present, all trades must be reported to a recognised exchange whether or not its system was used for the transaction. The LSE and other exchanges charge brokers for this service and also for access to the trading data they then provide. Under the directive, brokers will be able to report trades to any registered entity, opening up this area of business to competition.

The 10 banks, which between them dominate European equity trading, are equal partners in the plan and are working on a letter of intent. They deal with all European bourses, and believe Project Boat would be simpler, and deliver them greater control at lower cost. IT companies were invited last month to pitch to build and support the new system. Financial News reported that the contract had been won by the Swiss-owned exchange, Virt-x.

Project Boat is understood to be at a very early stage and unlikely to come to fruition before next year. Two banks that have not signed up to it are Lehman Brothers and JP Morgan, the LSE's corporate brokers. Revenues from the LSE’s broker services division, which were £125m last year, constituted some 43% of overall sales. They would be sure to suffer should Project Boat deliver. But the LSE, which does not state how much it makes from trade reporting, insisted this was only a small proportion of its broker business. A spokesman said: “We already have an efficient central infrastructure in place for reporting trades. The EU directive will be an opportunity for the LSE to capture new business across Europe as the market opens up.” The investment banks declined to comment.

Last month, the LSE revealed that record trading volumes in the first three months of its financial year contributed to revenues of Pounds 84.3m, 25 per cent higher than at the same time last year. The figures were buoyed by a rise of 6,000 to 89,000 in the number of terminals across the City carrying the LSE’s information. The performance was taken by the LSE board as validation for its determination to retain its independence in the face of a series of approaches.

© Graham Bishop

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