The World After MiFID
London-based consultancy LogicaCMG explores the potential impacts of the Markets in Financial Instruments Directive (MiFID) and forecasts three scenarios that may play out in the E.U.'s capital markets over the next five years:
1. The status quo is preserved.
Neither the NYSE nor Nasdaq succeed in taking over a major European exchange, and no further convergence of major exchanges occurs in the E.U. Trading fee structures are made fully transparent and decline sharply to head off competition from potential systematic internalizers (SI). E.U. markets garner an increasing share of global markets as IPOs in European markets remain buoyant and U.S. markets face stiff competition. E.U. member states do not carry through with legal and tax administration reforms that would level the playing field and encourage pan-European SIs.
The result: Trading costs decrease, but ambitions for broader competition in trading securities are stymied. The exchanges remain comfortably profitable and are able to continue investing in new technology, maintaining their economies of scale versus competitors.
2. Systematic internalizers become private, global stock exchanges.
Many firms set up SIs, some nationally based and others pan- European. Between them, they account for the majority of order flow in liquid stocks on exchanges and the bulk of total stock exchange turnover. Trading fees plummet, and it becomes a commodity business. News vendors compete aggressively to supply pricing information to firms, and investment firms and exchanges see their share of trading fall. The collapse in profits for exchanges prevents them from investing in new technology, and they let their economies of scale slip away. The scale and profitability of retail order flow allows SIs to offer very aggressive pricing. The lowering costs in owning securities boosts the net returns to investors, encouraging citizens to invest more toward retirement.
The result: Firms that jumped into building internalization capabilities gain a major competitive edge and smaller players are either weeded out or become vertically integrated global stock exchanges. But they are privately owned and span several regulatory regimes.
3. Between the extremes -- stable equilibrium.
At least one major European exchange is acquired by a U.S. exchange. At least five pan-European SIs form, and one major bank in each country creates an SI. Management of the U.S. purchases fleshes out the oversight of the new merged entity. News vendors buy smaller E.U. exchanges, giving them bargaining power and cutting into the profits of large exchanges. SIs struggle to develop vertical integration and don't provide significant savings to retail clients.
The result: An unstable environment in the long term, exchanges would find the competition increasingly stiff with a likely slow slide to the development of private stock exchanges in liquid shares. <<<