11 October 2006

Strategic report from industry guru Graham Bishop commissioned by LogicaCMG outlines three possible industry scenarios post MiFID

LogicaCMG, a leading IT services company, today launches a report authored by Graham Bishop, a leading European financial markets analyst, entitled ‘MiFID – An Opportunity for Profit’. Commissioned by LogicaCMG, the report outlines three industry scenarios post 1st November 2007, including the possible death of the stock exchange. It provides a detailed evaluation of the impact on a wide range of market firms, as well as examining the potential to profit through “passporting” of services or by becoming a Systematic Internaliser.

The Market in Financial Instruments Directive (MiFID) will allow the ‘passporting’ of financial services and the creation of one integrated financial services market across Europe. ‘Passporting’ enables all investment banks, portfolio managers, stockbrokers/broker dealers and corporate finance firms to provide cross-border services and establish branches without restriction in all EU member states. There is also an opportunity for some large pan-European banks and investment firms to gain new business by becoming Systematic Internalisers. Those that have a large flow of client orders will be able to match those orders internally, rather than taking them to a stock exchange.

Lode Snykers, international line of business director, financial services, LogicaCMG, says: “As with other legislation more can be made of MiFID than just regulatory obligations- there is an opportunity for growth and for profit. This is not to downplay the practical challenges of compliance – these are considerable and firms need to act now to turn clear strategies into practical action. This includes the management of processes, data and communications that are needed for pre and post trade transparency and compliance.”

Graham Bishop, adviser on European financial affairs and principal of GrahamBishop.com continues: “The pace of technological progress continues to be so rapid that the cost of compliance may not be as high as feared. Critically, the marginal cost for individual banks in becoming a Systematic Internaliser (SI) may be lower than many banks expect, so many more SIs may emerge than are currently expected.”

Three post November 2007 scenarios, which focus on the rise of Systematic Internalisers versus the potential decline of stock exchanges, are outlined by Graham Bishop in the paper.

Scenario I: The status quo continues
The policy objective of cutting trading costs is achieved in relation to exchange fees but the failure to complete all the flanking measures frustrates the ambitions for broader competition in trading securities. Indeed, the exchanges remain comfortably profitable and are able to invest in new technology themselves so they keep their economies of scale versus any competitor.

Scenario II: Systematic Internalisers become private, global stock exchanges operating vertical silos
The firms that took a bold view on becoming Systematic Internalisers turn out to gain such a major competitive edge that they reduce to a handful. In effect, they become vertically integrated, global stock exchanges. But they are privately owned and span several regulatory regimes.

Scenario III: Part way between these extremes – is that a stable equilibrium?
This situation would not be stable in the longer term if some of the stock exchanges find the competition increasingly hard, especially if they do not have a derivatives business. The tipping point could come if a listed stock exchange decided to split off its stock exchange business and preserve the high-growth derivatives profits so as to maintain the premium rating of its shares. Then the slide towards private stock exchanges in liquid shares would be underway

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