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25 October 2006

Reuters: Big Bang 2 for EU financial services?

Arcane regulation designed to harmonise securities trading across the European Union may well have consequences as far-reaching as the impact of London’s Big Bang 20 years ago.

Rule changes then turned London into Europe’s pre-eminent financial centre by opening up the city’s financial services sector to competition. In a similar way, Europe's Markets in Financial Instruments Directive (MiFID), due to come into force in November 2007, will help open up the European market.

For example, MiFiD will allow banks to become their own execution venues, competing with exchanges in trading shares, a first for most EU countries. Technology is key to the implementation of the regulation, because firms have to prove 'best execution' taking into account issues such as price, venue, cost and speed. Investment firms also have to keep records for five years.

“London grew up 20 years ago, but MiFID is causing a rapid amount of adolescence in European markets, which haven't had the freedom of choice and competition that the London market has had,” said Nic Stuchfield, director of corporate strategy at the London Stock Exchange. Friday is the 20th anniversary of the City of London's Big Bang, which scrapped centuries-old institutions such as the distinction between stockjobbers and brokers and allowed foreign companies to buy brokerages and investment companies.

At the time few people could envisage where it would take London as a trading centre. “Big Bang may have been the start of it, but the combined effect of liberalisation and technology have transformed the trading environment to a degree no one could have predicted,” said Anthony Belchambers, chief executive of the Futures and Options Association. The LSE’s Stuchfield, who was a member of the exchange in the pre-Big Bang era, agreed and said that technology fuelled a series of evolutionary changes in the market and would continue to do so at an ever-increasing pace.

“The cumulative effect is probably bigger than the earthquake itself, although the earthquake was clearly far and away the largest event,” he said. “There has been a level of persistent and dramatic evolution that completely transcended anything that happened in the 300 years before Big Bang. We'll see from now a greater cranking up of technology and a continued amount of competitive pressure.”

MiFID may cause the industry to fragment at the expense of the mid-market players. For big institutions the burden of new regulation and the costs of ensuring best execution is more than outweighed by the benefits of a liberalised European market. “The problem for the small and medium-sized firms who don’t do pan-European business is that it’s another step change in regulation for which they really get no benefit,” said the FOA's Belchambers. “The big institutions may want to compete, and there is frustration over the size of exchange fees at the moment. Opening up the market and driving in a new wave of competition may compel a reduction in fees that may be market driven.”

Last month, nine of the world’s top investment banks said they planned to set up their own share trade reporting system to bypass major European stock exchanges, as allowed under MiFID. “MiFID will change how companies are traded and how the trades in those companies are reported and through what exchange vehicle,” said Stephen Hazell-Smith, chairman of PLUS Markets Group, a UK equity market for small-cap shares.

For employees themselves, the increased reliance on technology requires a new set of skills. “If you don’t know anything about technology, you will not survive. You can't just rely on trading skills,” said Alasdair Haynes, chief executive of technology-based agency broker ITG in Europe. But PLUS Markets' Hazell-Smith said there will always be a place for the traditional broker. “Technology has changed, and the mechanics of how things trade has changed. But small company shares are relatively illiquid, so it requires a human being to find both sides of the bargain.”

© Reuters

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