Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Western EuropeNovember 3 2003

Legislation changes fuel euroscepticism in London

Paranoia is in vogue in UK financial circles. The EU’s recent move to ban internalisation could hit London exchanges hard and the europhobes are out in force.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

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?

Was this article helpful?

Thank you for your feedback!

Read more about:  Analysis & opinion , Western Europe , UK