LSE hit by bank plan to launch competing exchange

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Shares in the London Stock Exchange fell sharply yesterday as the company sought to hit back at the investment banks forming a rival pan-European share trading platform.

The seven banks, under the banner Project Turquoise, said they planned to slash the price of share trading - which could potentially benefit the pension funds and savings of millions of Britons. However, the London exchange claimed it had already sharply cut costs by the equivalent of £8.20 for every £1,000 traded.

It came as Deutsche Börse formally abandoned its attempt to merge with the Paris-based exchange operator Euronext and attacked its rival for "blocking all our attempts to build bridges" and wrecking the chance of a "European [exchange] solution".

London Stock Exchange spokesman John Wallace said in response to Project Turquoise: "Our investment in technology and trading services continues to reduce the cost of trading markedly for all investors.

"Since the introduction of SETS, the average weighted spread [difference between the cost to buy and the cost to sell] of shares in the FTSE 100 has reduced from 96 basis points to 14 basis points.

"That's an effective reduction of £8.20 for every £1,000 traded. To put exchange fees into perspective, for every £1,000 traded on our market, the Exchange fees account for less than seven pence."

The exchange added: "The London market is already open to competition with the existence of various trading venues."

Euronext declined to comment on the plan, while Deutsche Börse claimed it would not be greatly affected by the potential competitor.

But the LSE's views received short shrift from the powerful London Investment Banking Association, which said the decision to go ahead with Project Turquoise was born out of "frustration" with all the exchanges and their "refusal" to pass on savings to users.

Its chairman, Alan Yarrow, said: "The exchanges have seen huge increases in their margins on a fixed priced platform and haven't shared that proactively with their users. There is a huge degree of frustration out there. We have repeatedly put the point to them but they haven't listened so I commend this proposal."

Angela Knight, chief executive of the small stockbrokers lobby group Apcims, said: "This is obviously aimed at the major investment banks but it will provide a serious trading alternative and no doubt be helpful in putting some pressure on exchanges to bring prices down."

The seven banks - Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS - are responsible for more than 50 per cent of Europe's share trading volumes.

News of their launch caused the prices of all three major European exchanges to fall, although in the case of Euronext and Deutsche that was partly due to the ending of the merger proposal. The LSE's shares finished down 74p at £12.34, making it the biggest faller among Britain's 350 biggest quoted companies.

Two major investment banks have not joined, although JP Morgan is thought to be watching the situation closely. Lehman Brothers, the LSE's biggest user and one of its advisers, refused to comment.

Turquoise is due to launch next year, although several City sources predicted it might struggle to be up and running before the introduction of MifID (Markets in Financial Instruments Directive), the European directive designed to facilitate cross-border European share trading that was the catalyst behind Turquoise's creation.

Amid the mounting furore over the banks' move, Deutsche Börse's chief executive Reto Francioni insisted he had "no reason to resign" after the company's decision to end its attempt to break up a merger between Euronext and the New York Stock Exchange. It is the company's fifth failed attempt at a deal with another exchange.

Mr Francioni pledged to pursue expansion into Eastern and Central Europe "and other markets", refusing to rule out further attempts at deals. He said: "Our efforts to co-operate, to build bridges and ideas, they were all rejected one way or another or simply fell of deaf ears."

However, observers said they believed European competition regulators would have had little choice but to launch a full-scale inquiry into the proposals. That is because they would have involved merging the Euronext-owned London futures exchange with Deutsche's Eurex to create a single, dominant European derivatives exchange.

The price of NYSE's offer is also now worth €93.74 compared with Deutsche's €81.99 thanks to the sharp rise in the American company's share price.