Rival bourse must learn lessons of past

How much impact will a new exchange have? Photopress/Friedel Ammann

A proposed new stock exchange, backed by Switzerland's largest banks UBS and Credit Suisse, must avoid past mistakes if it is to succeed, an expert warns.

The two banks are part of a consortium that plans to launch a new trading platform in London. They were also behind the now defunct Tradepoint exchange that failed to make an impact in the 1990s.

The aim is to take advantage of new European Union regulations liberalising financial markets next year by setting up a new bourse based in London.

The consortium of investment banks complains that established exchanges charge exorbitant fees for trading on their platforms.

But Manuel Ammann, director of the Swiss Institute of Banking and Finance at St Gallen University, fears it may go the same way as Tradepoint.

Created in 1995, Tradepoint fell flat when it failed to attract enough trade from the London Stock Exchange (LSE). The proposed bourse will also go head-to-head with the LSE.

“It is very hard to grab market share from existing players because they have a lot of liquidity. The best prices are always found where the liquidity is,” Ammann told swissinfo.

“It will take a concerted effort from all the players in this consortium to offer better conditions for customers.”

However, consortium spokesman Nick Miles told swissinfo that the new EU regulations, known as MiFID, make the planned exchange a more viable proposition. Allowing trading to take place outside existing exchanges under the new system will enhance competition.

“These regulations will form a completely different environment this time around,” said Miles. “They are designed to create a real pan-European platform – which does not exist at the moment – and to stimulate competition between exchanges.”

Advanced technology available to the banks will also make it easier to get a new bourse up and running, Miles added.

Threat

Tradepoint eventually merged with the Swiss bourse (SWX) in 2001 to form the blue-chip trading platform virt-x.

Ironically, both UBS and Credit Suisse are members of virt-x and could now be creating a rival exchange.

“Given that the players associated with this consortium have around half the trading volume in Europe, they could become a threat to established exchanges,” Ammann said.

But SWX says it is too early to consider the plans a threat. The consortium has not released details of exactly what type and how many shares would be traded on the new exchange.

“We will have to see what happens in the next few months, but we are quite sure that we are well positioned with [Frankfurt-based derivatives platform] Eurex and virt-x,” said SWX spokesman Jürg von Arx.

SWX has already taken action to meet the expected increase in competition by lowering tariffs on its virt-x electronic trading platform.

It announced a three-month holiday from trading fees on that platform in September together with selected discounts starting at the beginning of next year.

The New York Stock Exchange reacted to the news by saying it expects yet more European bourses to spring up in coming years.

“At the end of the day, we anticipate there will be more of these [rival exchanges] forming in Europe, not less,” NYSE chief financial officer Nelson Chai said.

swissinfo, Matthew Allen in Zurich

In brief

The investment banking divisions of UBS and Credit Suisse were backers of a trading platform called Tradepoint that was set up in London in 1995 to rival the London Stock Exchange (LSE).

However, it failed to attract enough business from the LSE to survive on its own.

Tradepoint merged with the Swiss Stock Exchange (SWX) to form a new pan-European bourse called virt-x in 2001.

Virt-x is still trading, although it is now wholly owned by the SWX.

Key facts

The other members of the consortium to form a new stock exchange are investment banks Citigroup, Deutsche Bank, Goldman Sachs, Merrill Lynch and Morgan Stanley.
If it gets off the ground, the bourse will trade mainly equities but may later expand into other financial products.
London Stock Exchange operating profits surged 60% in the first half of 2006.
Paris-based exchange Euronext reported an 8% increase in profits for the three months ending on September 30.

MiFID

The EU’s Markets in Financial Instruments Directive (MiFID) comes into force on November 1, 2007. It is designed to cope with the ever-increasing volumes of cross-border trading involving more complicated financial instruments, such as derivatives and securities.

The directive aims to create a harmonised single financial market and regulatory regime across EU member states.

It will also abolish an existing rule that obliges investment firms to conduct all share transactions through exchanges.

Investment firms, such as banks, can apply for a “passport” that will enable them to trade throughout the EU. Such firms would have to be based in an EU member state.

The Swiss stock exchange (SWX) operates its pan-European blue-chip platform virt-x in London and the world’s largest derivatives exchange, Eurex, in cooperation with the German bourse in Frankfurt. The two bourses also plan to create a trading and clearing platform.