- Patrick Young
- Europe banks to launch derivatives platform
- www.ft.com
Summary
The political battle between the big banks and exchanges is becoming more explosive than ever.
Analysis
The fault lines in the battle for dominance in the financial intermediation business is getting a lot more fraught.
Exchanges see themselves as the rightful arbiters of trade execution while end user investment banks see themselves as the rightful source of the order flow.
As ever the truth is somewhere in between and the investment banks may yet be surprised by a slow growing understanding amongst end user investors that they are in fact the source of a great deal of the order flow the bulge bracket investment banks view as their own.
Meanwhile, in a world where exchanges are consistently reducing fees, the investment banks want cuts to be faster and deeper.
At the same time, the fact that the total amounts of money being paid by entire investment banks to each exchange per annum amount to the bonus on one medium sized investment bank trading desk seems to be overlooked by those who can only see “large” numbers wth several noughts on the end.
A sense of perspective suggests this is all about political domination and indeed the right of investment banks to intermediate as part of their survival in a world of microtrades and whisper it quietly, microbanks…
Meanwhile, this latest plan will have the same hurdles as all the other such plans (market structure history buffs will recall Brokertec, nowadays all the talk is coloured by Turquoise). Meanwhile, interested parties to such organised cartel-esque structure such as banks tend only to act with solidarity for so long before they seek competitive advantage…itself a story related to the history of much product development for instance. Moreover, management volunteers are often thin on the ground when it comes to working for a company whose revenue is only a few pence per trade compared to the much better margins to be had in investment banking proper.
More plans will emerge and more exchanges will perhaps even see the light of day (perhaps even Turquoise will yet launch) but ironically the richest pickings for all interested parties is in new products and not merely rebadging a trade in an even cheaper package than its curent tiny cost base. Of course banks dislike that assertion but given their ability to add considerable mark-up to their own value-added products using simple exchange building bricks, there is a certain interesting angle to how virulently they object to paying pennies to exchanges…
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