Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Final Frontier - Online Remote Trading -- Ignore unavailable to you. Want to Upgrade?

To: TFF who wrote (11980)	6/11/2007 5:43:22 PM
From: TFF	Respond to of 12617

The battle for control of equity trading William Wright 11 Jun 2007 Power is nothing without control, as the tyre company Pirelli used to say in its famous advertising campaign featuring Olympic sprinter Carl Lewis wearing a pair of red stilettos. When it comes to equities trading, the investment banks that dominate are used to having power and control – and they are terrified of losing them. The extended hostilities between them and larger exchanges over the past few years has long been painted by the banks as a question of cost. They are tired of the exchanges raising trading fees, or at least not lowering the unit cost of trading in line with the explosion in volumes over the past five years. The banks are also angry that anyone else should make profit margins as big as theirs. The exchanges reply that, as public companies, they have to deliver not only profits but also profits growth. The simmering row came to a head last year with the launch of Project Turquoise – a consortium of banks controlling more than 50% of equities trading in Europe that want to create their own trading system – and Project Boat, a slightly larger consortium of banks that is building a system for trade reporting. In both cases, the banks have focused on the high cost of paying exchanges to perform these services as the rationale behind them. They are helped by the introduction of the markets in financial instruments directive in November which will reduce the barriers to entry in each market. But this is not a battle about cost. It is a battle for control. The investment banks are desperate to retain control of the trading business, not only from the exchanges but also from their clients. With that control comes power – the power of knowing what is happening in the market – and money, because controlling order flow is far more valuable than simply earning a commission for handling it. The numbers support this view. Last year’s combined revenues from equities trading at Deutsche Börse, Euronext and the London Stock Exchange was more than $1.1bn, and the sale of information based on trading volumes generated a further $565m. This may look steep but it is tiny compared with the money banks make from trading. Last year, Goldman Sachs alone made $8.5bn in revenues from equities trading. Exchange fees could always be lower, but they account for only a few per cent of the cost of trading, compared with about two thirds going on commissions and one third on market impact. Understandably, banks do not want to pay a fee to an exchange to do something they believe they could do better, then pay another fee to buy back that information. Yet, despite their claims to the contrary, they are aware they do not own the trading volumes they put through the exchanges. Apart from proprietary trading, the order flow belongs to their clients. More sophisticated clients are looking at ways of reducing what they spend on their brokers, and are under regulatory pressure to separate decisions over who to trade with from other valuable services such as research and access to new issues. Many clients are also unhappy that banks use their orders to trade against them. By creating their own system, the banks hope not only to reduce the fees they pay to exchanges, but to generate enough liquidity to achieve a tipping point. This in turn would effectively force their clients to continue using them, whether as a broker to access an exchange or by trading directly on their system. If it cannot generate enough liquidity, the overall cost of trading for clients will increase. Investment banks are nothing if not ingenious at finding new ways of making money and overcoming new challenges. But both projects might have more chance of success if the banks were more honest about their motives.