LogicaCMG, the IT company supplying many larger financial services customers, says implementation of MiFID rules could lead to the ‘death' of the London Stock Exchange.
The suggestion comes in a report from financial markets analyst Graham Bishop, commissioned by LogicaCMG, which suggests there are three possible industry scenarios after 1 November next year - when MiFID comes into effect – all of which rest on the development of so-called systematic internalisers.
As the regulations would allow larger financial services groups to match client buy and sell orders internally without being forced to go through a recognised exchange such as the LSE, the question now is to what extent internalisation may take place, the report warns.
In the first scenario, Bishop suggests the status quo will be maintained because despite pressures to reduce their fees, the recognised exchanges will still be profitable and able to invest in new technologies, hence retaining their economies of scale against competitors.
The second option rests on larger systematic internalisers becoming de-facto private global stock exchanges. This would depend on internalisation gaining such a competitive edge, the subsequent industry consolidation would leave a handful of vertically-integrated global exchanges, which are privately owned and span different regulatory regimes.
The third scenario is somewhere between the two above, Bishop’s report suggests. There would be no guarantee the industry balance between exchanges and internalisers would be maintained, especially as competition bites over the long term and if the affected exchanges lack derivatives business.
The competition may also lead stock exchanges to split off the exchange business from the derivatives profits in order to maintain a premium on any of their own shares. However, this may also turn the industry back towards private ownership of exchanges.
LogicaCMG would likely be involved in any one of these scenarios given its position as an information and telecoms supplier to the financial services sector.
Lode Snykers, the company’s international line of business director for financial services, notes MiFID is about more than just responding to regulations, as the report suggests there are business opportunities too.
However, whether systematic internaliser or not, the challenges “include the management of processes, data and communications that are needed for pre and post-trade transparency and compliance”.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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