Plans to challenge the hegemony of established stock exchanges and their pricing levels may leave the more expensive providers of discretionary broking and advisory services exposed.
The news a number of investment banks are far advanced in co-operating to build a new system to challenge the emerging cross-Atlantic stock exchanges involving Nasdaq, NYSE, the London Stock Exchange, Euronext and Deutsche Bourse is merely the latest comfirmation of the brave new world being unleashed by European regulatory changes.
The new platform is able to come about because of rules contained in MiFID and other regulations, as well as the pressure being applied by major financial institutions to be able to internalise trading between their own clients – a method by which different clients of the same bank or insurer can trade shares without having to go via a recognised exchange.
There has always been a certain amount of off-exchange activity involving ownership of equity, such as placings of stock with certain investors before shares have been admitted to an exchange.
What has changed is the emergence of the new rules alongside yet more powerful IT systems able to withstand systemic shocks, and which offer the ease of use and risk mitigation required to enable such off-stock-market trading to flourish.
And the new players are unlikely to face any difficulty persuading users their systems are at least as safe as existing platforms: how many can forget telling clients they were unable to trade stocks on the last day of fiscal 1999-2000 to mitigate capital gains tax exposure, when the London Stock Exchange’s systems went down.
The ultimate objective of the banks involved in the latest news is, of course, to cut costs and be able to offer customers new levels of service. For the intermediary community relying on providing managed stock broking services this will come as a further challenge. Because these banks and other institutions are wholly intent on bringing further price transparency to the world of stock trading, it will shine a very bright and perhaps unwelcome spotlight on those who persist in charging 5%, 6%, 7% or more, merely for making investment decisions on behalf of retail clients.
But – and this is not yet clear – it could also be the case these new IT systems enable greater transparency of costs in the area of collective investments too. It remains to be seen if unit trust and Oiec providers can use the new platform being promised to manage investments more cheaply. This would boost their own profits, but could also cause further downward pressure on margins paid to intermediaries on the monies received from investors.
The flip side is the new platform may lower the barrier to entry to new collective investments providers, which would increase competition for distributor partners, instead driving up the prices they might be willing to pay to access adviser’s clients – in other words, higher margins paid to advisers.
There will also be a new pricing dynamic at work for execution only stock brokers. There are already enough grumblings about the fact UK investors have to pay far more per trade than they would in the US market.
Cross-border ownership of stock exchanges involving Nasdaq and NYSE will only increase calls for UK investors to get the same deal their US counterparts do. It could be the new platform being promised as an alternative to existing exchanges may drop the price of trading even further, thus putting even greater pressure on execution only firms to reduce the price differential on broking services.
The great unknown is how the FSA will treat the proposed alternative. For example, if liquidity is different to that enjoyed on established exchanges, it may want to ensure investors are sufficiently aware of this difference before they are allowed to trade.
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
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m