The FinanSer

Exchanges fight over speeds and feeds misses the point

It is fascinating to watch the fight that is going on between the traditional exchanges – Deutsche Bourse, Euronext and London Stock Exchange (LSE) – and the new guys – Chi-x, BAT, virt-x, PLUSMarkets, Boat, Turquoise, NYFix Millennium, NASDAQ OMX, Equiduct …

The fight is over liquidity, trading, order execution, pricing, clearing and settlement.

In fact, on that note, we should throw in LCH.Clearnet, Clearstream and Euroclear in their battles with EuroCCP, Rainbow and friends.

There is no doubt that MiFID has been a trigger for change, although the resulting changes are yet to be seen. In other words, we are seeing change, but just do not know the long-term landscape, winners and losers as yet.

The reason for mentioning this today is two-fold.

First, LSE came out yesterday saying that the new guys had to fight on some other ground than latency. Second, Turquoise’s leadership – Eli Lederman, CEO and Adrian Farnham, COO – are addressing the Financial Services Club next Thursday with their views of what it takes to win in the future.

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The alien world of Exchanges

Yesterday was interesting.  I was invited to speak at a conference for Exchanges  and the expected players were there: Deutsche Bourse, Reuters and the London Stock Exchange (LSE); and then there were the newer markets with the Prague, Warsaw and Bratislava Stock Exchanges; and then there were the others: NYSE Euronext, Euronext.liffe, Chi-x, Turquoise, Equiduct, Virt-x and PlusMarkets.

The interesting part it that most of the latter names didn't exist until a year ago.  Suddenly we are living in an alien world where, in the last year, we've seen an explosion of execution venues and players in the exchange markets thanks to MiFID. MiFID means that the traditional players - the LSE and Deutsche Bourse - are now just execution venues competing with Multilateral Trading Facilities (Chi-x) and Systematic Internalisers (Turquoise).

One of the key things I noted in my presentation is the recent news of the suspected reverse takeover of PlusMarkets by Turquoise.  Shares in PlusMarkets were suspended on 5th October with the firm valued at £88 million, as Turquoise rumours abounded, although it should be noted that these rumours are still not proven.

Why would Turquoise need PlusMarkets? 

First, to get the technology platform behind PlusMarkets - OMX.  The complex negotiations around this platform have already delayed Turquoise's launch by six months or so, and a reverse takeover would speed this up.   

Second, it would give Turquoise the ability to compete head-to-head with the LSE and others, as it would give Turquoise the status of 'Recognised Investment Exchange' (RIE).  An RIE can take primary listings which currently is the hallowed ground of the LSE and PlusMarkets (Chi-x is a secondary listing MTF), hence Turquoise would have serious bite. 

Finally, the takeover would give Turquoise a management team led by Simon Brickles, the enigmatic CEO of PlusMarkets.  For a long time now, we've all been saying that Turquoise is a good idea in principle but who's going to run it?  Now we may know.

If the takeover doesn't happen, it would be a surprise and a shame as it makes good sense for both sides.  Funnily enough, one person made the comment that this would take us back to the pre-Big Bang days where the main trading exchange is owned by its members ... those were the days!

Meantime, the other interesting debate was around the fact that the FSA has yet to approve Project Boat's application for TDM (Trade Data Monitor) status.  Boat announced (10 page pdf) in April that they would be applying for such status but the FSA has yet to process.  This could effectively constrain their success, as the FSA have made it clear that investment firms only have a 'safe harbour' if they use an FSA-approved TDM.  However, the core opinion was that this is an example of FSA gold-plating and that CESR will not recognise this layer of regulation around 'FSA-approved TDMs'.  After all, you cannot have a local ruling under a pan-European implementation, so this is discounted under MiFID interpretations as just being local noise.

Should be interesting to see if the markets view it that way.

JWG-IT TechSIG ready for the MiFID marathon

Despite some uninformed comment of late, investment firms are scrambling to get to the MiFID starting line for 1 November, just one month from today. 70% of the EU market volume is currently MiFID ready in the 40% of member states that have formally adopted the Directive, and JWG-IT predicts the EU will have over 80% of the market in the MiFID zone within the month. Jitz Desai, Director of JWG-IT commented, “The firms’ priorities have remained customer-centric with best execution, client classification, transaction reporting and record keeping topping the list, however, we expect priorities to shift as the regulators flex their muscles. For example, the FSA have indicated outsourcing and conflicts of interest are hot issues, despite the firms ranking these as bottom quartile concerns this summer.”

The JWG-IT TechSIG has been gearing up for the MiFID race with a tailored approach to meet firms’ needs. Nigel Woodward of Intel and Chair of the group commented “We have heard the firms loudly and clearly - there is no silver bullet to MiFID. We are now working together in smaller ecosystems to tackle difficult issues and develop collaborative solutions. Some of these solutions are already in the market and the first of our RFIs will be available to firms soon for their use in compliant and competitive solutions. Our approach is working and this is reflected by our rapidly growing membership that is now up to 29, on track to our target of 50 by year end”.

Business Objects, EMC, FRS, Gemstone, Kalido, SGI and Symantec have joined JWG-IT in the last 2 months. Ken Won, director, Enterprise Marketing, SGI said “As a JWG-IT TechSIG member, we look forward to sharing our expertise in collaboration with other industry innovators to define a solution stack aimed at addressing the broad requirements of MiFID. The end result should provide financial services companies with a framework for IT solutions that will help them comply with MiFID, as well as Regulation NMS in the U.S., while keeping pace with soaring data volumes, escalating transaction processing demands, and growing pressures to implement IT resources that are cost-, space- and power-efficient.” More significantly, the firms appreciate the vendors’ collaborative approach as Parm Sangha of Cisco and Vice chair, TechSIG explained. “We received a very complimentary 4 to 4.3 out of 5 from firms attending our recent record keeping seminar held in conjunction with the Investment Banking Records Management Forum. We will be continuing to work with firms as well as issuing new whitepapers from our three workgroups: Doing the Trade Right, Reporting the Trade Correctly and Storing and Retrieving Records”.

JWG-IT TechSIG also announced the launch of their new website, www.MiFIDgroup.com where 7 new podcasts are available for free download.

P J Di Giammarino, CEO, JWG-IT, summed up, “MiFID is not a sprint or a quick fix. This is a marathon and only those with robust plans will see the finish line without penalty. Firms need to pick the right MiFID support team, intelligence and race strategy carefully. We continue to see great take-up of our benchmarking services, to establish 1) how far off the curve a firm is, 2) their relative degree of MiFID “readiness” and 3) the appropriate action plans to safely navigate the course.

To learn more please contact:
PJ Di Giammarino, CEO, JWG-IT pj@jwg-it.eu
Nigel Woodward, Chair, TechSIG nigel.woodward@intel.com