Banking giants create rival exchange

Seven of world's biggest investment banks form exchange in challenge to traditional bourses
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Seven of the world's biggest investment banks will lay down the gauntlet to Europe's stock exchanges today by announcing an agreement to create their own pan-European share trading platform.

The platform will initially offer trading in Europe's biggest stocks, with the stated aim of substantially cutting the cost of buying and selling shares.

The seven, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS, will be shareholders in the company that owns the platform. They are planning to have the platform up and running next year.

In addition to the seven, the company will aim to attract business from other brokers who will be able to use the system on an equal footing with the founders.

They are set to contact rival brokers over the coming months in a bid to sell them on the merits of the new platform and persuade their traders to use it.

The platform is being established in response to the European Union's Markets in Financial Instruments Directive (MiFID) which aims to create a single market in financial services and facilitate cross-border trading in the continent's biggest stocks. MiFID will be implemented in November 2007. However, the new platform could later expand to include trading in companies outside the elite group.

Because MiFID imposes a requirement that brokers seek "best execution" - in other words the best price - for their clients, the seven banks' traders will not be allowed to exclusively use the new platform because they will be required to trade over domestic exchanges if cheaper prices are available.

However, it will still be seen as a threat to existing European stock exchanges such as the London Stock Exchange, the Paris-based Euronext and Germany's Deutsche Börse.

Between them, the seven account for more than 50 per cent of share trading volumes on the London Stock Exchange.

One source said: "If I was [the London Stock Exchange chief executive] Clara Furse right now, I'd be quaking in my boots. We think this will provide a serious challenge to the existing exchanges."

However, others have been more sceptical, questioning whether the banks would be able to maintain a consensus for any length of time.

Brokers have long complained that exchanges have been making excessive profits at their expense since converting from member-owned mutuals to commercial companies.

They believe customers have not enjoyed the benefit they should have from the increased commercialisation this has brought.

Exchanges have been watching the talks between the seven with increasing nervousness over the past few months, although there were initially doubts over whether the seven companies would be able to reach agreement given the vicious competition they engage in on a day-to-day basis.

Exchanges charge a small fee for every trade executed, and therefore the new platform could seriously hit their revenues.

The seven, along with HSBC and ABN Amro, are also collaborating in Project Boat, over data reporting, which could hit revenues the exchanges generate from this activity.

The launch of the new platform is also set to have implications for the wave of consolidation sweeping the industry. The New York Stock Exchange is battling Deutsche Börse for control of Euronext, although the German company is thought to be on the verge of pulling out. Nasdaq, which has a 25 per cent stake in the LSE, is widely expected to make a fresh approach to the London exchange over the coming months.

It is thought the seven are looking at new ways to clear and settle trades over the new platform. The banks are keen for a new organisation to handle this key function.