Electronic
trading in europe: A Mega Bang waiting
to happen?
by Charles Goldfinger*
If the deregulation of European equities markets in the 1980s was called a Big Bang and the global capital markets transformation, a financial revolution, what should we call a revolution that is beginning to up-end and disintegrate all traditional approaches? Globally, the explosion of electronic communication and information technology, infiltrating every core aspect of financial services: wholesale and retail, banking and financial markets, trading and settlements, is more of a Mega Bang.
It is a matter of fact that the scope and pace of change are already breathtaking. In the last 25 years, capital markets have changed more than in the preceding 220 years. And yet, this is only a beginning: the bulk of changes is still to come. These changes will combine continuity and disruption. On the one hand, existing geofinance trends will persist: globalisation, deregulation and integration of finance and technology. At the same time, as is already happening in the US, the Internet will drive far-reaching shifts in market and hierarchies, as well as in product/service offerings. Cyberfinance will complement, amplify but also subvert the geofinance.
Obviously, the Internet is considerably more than a networking protocol and set of communications standards. It is a broad environment, which encompasses both technical and business architectures. It blurs the boundaries between processing and communications. As Sun affirms, the “network is the computer,” and the converse is true as well: the computer becomes the network.
It is not just hype: forecasts on the speed and the extent of adoption of Internet-related technologies and applications, as wildly optimistic they might have seemed at the time of their publication, have been outpaced by actual market development. The Internet is having a broader, deeper and more destabilising impact on both IT domain and application businesses than the personal computer. And that impact is nowhere near fully realised. In a nutshell, Internet environment means:
·
WARP SPEED of development and, above
all, of diffusion of applications, products and services. Applications’
tendency to obsolescence is increased and their lifecycle, shortened.
· LOW COSTS: even if Internet development and operational costs are not as low as asserted by its most enthusiastic proponents, they are considerably lower than that of traditional networks and application distribution. Similarly, the Internet significantly lowers business transaction costs. Business implications of low costs are twofold. First, there will be an explosive growth of Internet-based transactions. Second, competition will increase, with a lot of players in the same game, and limited margins with which to create a leading position.
Disruptive
and disrupted
The Internet business model is both disruptive and disrupted. It is
disruptive, because it allows a wide variety of pricing and valuation
approaches. The Internet provides extraordinarily sophisticated tools for
transaction and behaviour monitoring: every click, every eye movement can be
recorded and analysed. However, that does not imply that Internet
transactions can easily priced by the service supplier and willingly
paid by the end-user. In the virtual
world, value transfers are no longer tied to the actual exchange of goods and
services, as it is the case in the physical world. The Internet generates tremendous value-added
to its users and suppliers, but this value can no longer be captured by traditional
methods such as marginal cost pricing or transaction fees. Third party and indirect
pricing are likely to be the rule rather than the exception. The Internet
business model is also disrupted because, especially in Europe, very few businesses
understand the new economic logic and therefore most of the current models are
preliminary and transitional.
A Mega Bang waiting to happen?
The cyberfinance explosion
is accelerating as experienced US players are sweeping into Europe. Charles Schwab and E-Trade have announced
their ambition to become European leaders. Other American institutions are active
in alternative trading systems. They have participated actively in the
recapitalisation of the London-based electronic market, Tradepoint (in
association with Instinet, which, although controlled by Reuters, has kept its
US roots), which is intended to become a pan-European electronic market. Knight
Trimark, together with a number of US investment banks, has taken a 20% stake
in Easdaq and announced its ambition to use it as support of a trading system
for all European equities.
However, European markets
differ in many significant respects from the US markets (for instance, all major
markets on the continent are structured around a central electronic order
book). Alternative trading systems
designers need to have intimate knowledge of European trading environment.
The convergence of eurofinance and cyberfinance creates an opportunity for Europe to catch up with the US in the area of Internet securities trading. For this to be realised, sustained effort is required both from the market participants and from the regulatory authorities. Market participants need to adopt bolder strategies and to take advantage of Internet potential to transform equity trading from a niche segment into a mass market. To do so, it is not enough to offer speedy, effective and highly scalable transaction execution and post-trade processing. It is also necessarily to improve the quality and availability of information about markets and their participants. Traditional distinctions between institutional and retail markets or proprietary and open systems are no longer relevant, user friendliness is paramount and interoperability is a core constraint. Speedy roll-out of products and applications is a sine qua non in order to stay in the game. Information needs to be generated through close interaction with customers, in recognition of a fundamental maxim for on-line client service strategy: always assume the customer is smart.
Traditional businesses are highly likely to face strong internal resistance to the new approaches. To overcome these, they need to be stimulated by newcomers, who are not burdened by legacy systems. This has been already the case in Germany, where Consors stimulated overall market development and in the process has raced ahead of broking subsidiaries of major German banks.
Regulatory framework
impediment
Whilst SEC in the US has created a special status for Alternative Trading Systems, in Europe such status does not exist. Its creation would undoubtedly contribute to the emergence of European ECNs. More generally, the current regulatory patchwork constitutes a serious impediment to cross-border trading, which needs to be streamlined and harmonised. The creation of a European SEC should be put on the political agenda of the European Council of Ministers.
For more information contact:
Name: Charles Goldfinger
Tel: 00322-7631270
Email: Charles-Gold@compuserve.com
Web site: www.ispo.cec.be/fiwg