When investors and brokers speak of electronic exchanges and trading platforms, the issues revolve around speed, efficiency and lower costs. The worrying thing for the major physical exchanges is that these three characteristics apply not only to trading, but also to business development. A classic example of this could be found in an announcement by Tradepoint last month.
From July 10, the electronic market plans to operate the first integrated pan-European stock exchange for blue chip stocks. ”The launch of the European platform is consistent with both Tradepoint’s and the consortium’s objective of developing Tradepoint, on its own or in partnership with other organisations, as the principal marketplace for trading Eurotop 300 stocks by the fourth quarter of 2001,” says Richard Kilsby, the company’s chief executive. The consortium referred to has a 54% interest in Tradepoint and is made up of leading international brokerage and financial services firms.
The company’s declared aim is to be the lowest-cost stock exchange in the world, and to deliver those benefits to its 100-plus members. The addition of some 230 blue-chip stocks from the main European indices to the 2,000 UK equities available through its order book shows Tradepoint means business. So does the announcement of a link-up with GL Trade, the financial software provider, which has a strong European customer base, to expand the reach of that order book.
The speed at which the private companies behind the new exchanges have developed their businesses has taken some of the older establishments by surprise. “The evolving role of electronic exchanges in the world financial marketplace has influenced our decision to place the highest priority on integrating Tradepoint into the GL Trade network,” says Malcolm Donaldson, managing director of GL Trade in the UK.
The speed of these developments is matched by the falling costs. Tradepoint announced it was reducing its transaction fee for all order book transactions for six months from early July, and abandoning its minimum charge for transacting business on the network.
On the international bond market, costs also play an important part when it comes to choosing a trading platform. What was traditionally a telephone-based market has seen the emergence of a number of electronic platforms in the past two years. One of these, Coredeal, has looked to attract members by adopting a different pricing system as well as an innovative settlement system.
Members pay a one-off annual fee, and are offered unlimited trades – consequently, the more trades made, the cheaper the unit cost. This aggressive approach is reflected in the anonymous execution and settlement system, which involves trading against the exchange’s own central counterparty. By avoiding the use of a financial intermediary, members make considerable savings, and straight-through processing also reduces costs.
Although lagging behind the equity market in terms of electronic platforms, there is little doubt that in the long term we are likely to see mergers and consolidation among companies providing electronic platforms for the international securities market.
Inevitably, these developments have attracted the attention of the FSA in the UK as well as regulatory bodies across Euroland. The recognition of Coredeal gives its members a confidence unparalleled in the fixed income trading environment, but the authorities are keen to get the industry’s thoughts on regulation. The position of ‘trading facilities’ such as Ofex has also forced the authorities to think long and hard about how regulation will work in the 21st century.
At the beginning of the year the FSA produced a discussion paper laying out some thoughts on how it might develop its approach to the regulation of market infrastructure providers, at a time when the rapid growth of electronic trading is changing market structure and trading practices. Market infrastructure providers are those entities whose business is organising and supporting the functioning of markets, for example, exchanges, clearing houses, non-exchange trading systems and service companies. The FSA is seeking to stimulate debate as to how it might develop its regulatory approach to address any new risks arising from these changes without unnecessarily impeding competition and innovation.
Under the current arrangements, market infrastructure providers may opt to be regulated either as recognised investment exchanges (or recognised clearing houses) or authorised firms. But in the developing market environment, the previously clear-cut lines that identified these groups as distinct are being blurred. The two regimes have different regulatory objectives and have different implications for the entities concerned.
These are the issues that the FSA now seeks to address. For example, are there continuing good reasons for applying different regulatory requirements to authorised firms, some of which are increasingly carrying out business similar to that of a recognised exchange, as to the exchange on which other market users trade? This is the case as the rules stand today, with the obvious implications of such arrangements on the fairness, efficiency and safety of the markets.