Anybody who thought investment bankers were at the forefront of calls for greater efficiency in European securities trading, clearing and settlement has not read a recently updated survey of published by IT consultants Charteris.
Far from wishing to see the European Securities Forum (ESF) achieve its aims of rationalised infrastructure of fewer CSDs, CCPs and trading platforms, it seems the standard of living of investment bankers depends on the very inefficiencies the ESF criticises.
The survey found that the status quo in Europe’s financial markets carries built-in benefits for investment banks which act as a disincentive to them to press for reform in areas such as trade processing. These benefits include the opportunity to mark up the costs associated with inefficient securities trading and then pass these costs on to customers.
The survey, ‘European Financial Markets 2001 – Revolution or Evolution?’ was undertaken by business and information technology consultancy Charteris plc, to establish the London view of future developments in European financial markets.
The survey identified three groups with overriding influence on European markets:
Major investment banks: their influence was seen as decisive;Market organisations: exchanges; electronic communications networks (ECNs) and clearing and settlement providersGovernments and regulators: although the European Union (EU) was not perceived as intervening actively in financial trading, there are important national government agendas.
The major investment banks (primarily Goldman Sachs, Merrill Lynch, Morgan Stanley, Salomon Smith Barney (Citigroup), Credit Suisse First Boston, Deutsche Bank, J P Morgan/Chase and UBSWarburg), were seen as calling the shots in the European financial markets.
These banks are the major users of European financial exchanges and clearing and settlement providers. They are significant shareholders in many of these organisations.
Respondents concurred that the major investment banks are driven strongly by the bonus culture. As long as bonuses fail to reflect the true costs of trading, clearing and settlement, there is little incentive to contain costs or even to conserve capital and hence no real driver to make the operation of the markets more efficient.
In the case of a prolonged recession investment banking services, in particular integrated trading and settlement services for external customers, would become increasingly cost-sensitive.
This would cause a fundamental re-appraisal of cost bases. Fund managers and other institutional customers would find themselves under severe pressure to reduce costs and would seek cost savings from their suppliers, including banks and brokers.
Additional key findings of the survey include:
A European Stock Exchange ‘premier league’, consisting of the current big three exchanges, London Stock Exchange, Euronext and the Deutsche Boerse, is expected to emerge. As the major brokers increasingly concentrate on trading blue-chip stocks rather than small to mid-caps, the Premier League will acquire most blue-chip trading in Europe at the expense of smaller exchanges. This tendency is likely to be fuelled by pensions reform, which will increase the demand for blue-chip investment vehicles, as well as by the growth of Europe-wide sector-based share trading.
Even in clearing and settlement, where everyone complains about inefficiency and cost and wants rationalisation, no-one expected radical change because the major investment banks benefit by integrating trading, clearing and settlement for their customers.
All respondents similarly expressed a desire for harmonisation of regulations, albeit only on the UK model where regulation of professional traders and investors is seen as ‘light’. However, elimination of regulatory differences was seen as too difficult for governments and regulators and their existence as advantageous for the major banks.
Chris Rees, a director of Charteris and head of the team which undertook the survey, commented that many outsiders and commentators believe that European financial markets are heading for a revolution with pan-European equities trading expected to develop quickly and electronic communications networks predicted to be on the verge of stealing liquidity from traditional exchanges. There is also a belief that European clearing and settlement provision were finally to be consolidated and radically streamlined. Despite recent moves such as the Deutsche Boerse’s acquisition of Clearstream and the Lisbon Exchange joining Euronext, there is little real evidence that this is happening.
He added that the survey has shown that with market inefficiencies generating revenue for investment banks, they have minimal motivation to lobby for change and prefer to retain the status quo. This is in a sense an alarming conclusion and one that regulators and governments need to consider very carefully.