Broker-Exchange Battle Goes Global

By Maria Trombly | Securities Industry News | September 18, 2006

The U.S. pattern of stock-exchange consolidation, which has recently spawned a flurry of new investments by market participants in alternative or smaller trading venues, is repeating itself on two continents. Just as NYSE Group and Nasdaq Stock Market are integrating acquisitions and looking to Europe for expansion while competition is stirring at home, new industry-backed ventures are mounting challenges to the dominant Australian and U.K. exchanges.

A week ago, the New Zealand Exchange (NZX) announced that it incorporated an electronic communications network (ECN) to offer trade execution and reporting services in direct competition with the Australian Stock Exchange (ASX), which is not only that country's principal equities market but is also merging with the Sydney Futures Exchange to form a cross-asset-class mega-market. NZX will own 50 percent of the new entity, with partners Citigroup, Merrill Lynch, Goldman Sachs JB Were, Macquarie Bank and Commonwealth Bank of Australia's CommSec subsidiary each holding 10 percent.

That news came a month after published reports in London that a group of ten banks were collaborating on a trade reporting facility that would provide an alternative to the London Stock Exchange (LSE). Dubbed "Project Boat" and scheduled to launch in 2007, the initiative is backed by Citigroup, Deutsche Bank, Merrill, UBS and six other firms that have not been publicly mentioned. The banks did not respond to requests for comment last week.

An ASX spokesperson said the exchange would not comment, and spokespeople from the banks in the NZX-led effort referred questions to NZX, whose CEO, Mark Weldon, said in an interview with the Australian Broadcasting Corp., "The brokers have very much decided, around the world, that as exchanges consolidate, it's important that there is competition on price, on innovation and on technology."

An NZX official who asked for anonymity told Securities Industry News that the new ECN is scheduled to go live in 2007 on the NZX technology platform--which is in line for an upgrade--and is waiting for a license to operate in Australia. "We think the regulators are in favor of this," said the source. "They welcome the competition."

The new London trade reporting facility would let investment banks that internalize trades and use other alternative markets avoid the fees they pay the LSE to print their trades. Until last year, U.K. regulations required all trades in LSE-listed shares to be reported to the exchange. But with market data fees on the increase, both buy- and sell-side firms have been looking for cheaper alternatives.

The LSE issued a statement about Project Boat that said, in part, "Developing new and disparate solutions can add extra cost, but the investment banks are exercising normal business rationale by looking at a range of options. We are confident that a central infrastructure solution will ultimately be the most efficient as we have the links in place to perform these functions on behalf of the investment banks."