Just because you’re paranoid, it doesn’t mean they’re not out to get
you. And the muttering behind locked doors around London shows that the
British-based financial community is sure the Eurocrats (obviously in
the pay of Milan and Paris and any other aspiring rival to London’s
liquid markets) are clearly gunning for it.
If many British people already sported Eurosceptic tendencies, then
last month’s approval of the draft of the European Investment Services
Directive (ISD) by Ecofin, the council of finance ministers, could only
have strengthened their belief and added to their number.
The ISD, a central plank of the financial services action plan to
create an integrated European financial market, is intended to set down
EU-wide rules for investment business by banks and stock exchanges. But
several of its measures – vigorously opposed by the likes of the UK,
Luxembourg and Ireland – are seen as a thinly disguised means of
protecting continental European stock exchanges at the expense of
others; indeed at the expense of free and fair competition.
Last month’s events also shed unflattering light on some of the darker
dealings that many suspected were being undertaken in Belgian
corridors.
Forced vote
In a very unusual move, the Italian presidency “forced” through a
vote banning internalisation – the practice of matching large buy and
sell orders outside of the main market mechanism – on the grounds that
prices at which firms are prepared to execute trades should be
published, thereby improving transparency and liquidity and,
ultimately, giving retail investors a better deal.
Londoners say that this argument is topsy-turvy. They maintain that
internalisation lowers trading costs and ensures discretion for market
participants. Should large block orders be exposed to the open market,
the price will surely move away from the buyer or seller, thereby
pushing costs up and potentially making the trade uneconomic. And who
is the end investor in a large institutional fund if not the retail
client?
Suspect process
As disturbing, is the suspect process by which the legislation was
frogmarched through the chamber: the Italian presidency did not even
base the council’s decision on a European parliament draft that had
been debated and consulted upon. It produced an alternative draft, that
sources say was tabled so late in the negotiations that several
delegates were unsure on what they were voting.
If proof be needed that the internalisation debate can be used to
stifle competition, then look no further than Chicago, where the
Chicago Board of Trade is desperately trying to block German-Swiss
derivatives exchange Eurex’s launch of a competing exchange by using
this complex argument to muddy the regulatory waters and delay, if not
end, its US bid.
However, the European legislation will do no harm, for example, in
Italy where internalisation is not practiced. On the other hand, it
will hit London hard, where three-quarters of internalisation takes
place and, according to industry estimates, it accounts for up to 30%
of the market. Interestingly, internalisation is not opposed by the
London Stock Exchange, nor used as an excuse for lack of liquidity.
Many commentators are thus lending a sympathetic ear to frustrated
bankers whom might otherwise have been dismissed as whining paranoiacs.
And if internalisation is no longer allowed to be undertaken in London,
or elsewhere in Europe, the business will naturally gravitate to those
markets that allow it to continue. Anyone care to take a bet on how
quickly this legislation shifts the execution of European block orders
to New York?