The survey's findings also suggest 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.
Antoinette Hunziker-Ebneter, Chief Executive of Europe's virtual financial market virt-x, was guest speaker at the launch which was held last night in London. Commenting on the survey's findings, she said: 'The Charteris survey provides unequivocal evidence that Europe's investment banks are focusing more and more on blue-chip equities and that the industry is increasingly managing assets on a pan-European and sectoral basis'.
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 and to identify the major pressures and trends affecting these developments. Charteris canvassed leading London-based market participants between June and September 2001. All the interviews occurred before September 11.
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. Furthermore the major investment banks already have front and back office systems which handle the existing complexity, thereby constituting a serious barrier for entry to new players.
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 banks 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. Survey respondents did not expect further mergers between the big exchanges but believed that life will continue to get more difficult for smaller exchanges. They will either have to be taken over, find themselves obliged to outsource their operations or shrink their cost bases.
- Despite electronic communication networks (ECNS) having done so well in the USA, ECNs are thought unlikely to gain a foothold in Europe except perhaps at the lower end of the bond market. The telephone remains the instrument of choice for the larger bond trades. Survey respondents do not believe that the equity and derivatives markets exhibit the same inefficiencies that afford ECNs such comprehensive opportunities in the USA.
- 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'. For it to be effective, some pointed out that harmonisation would also be required in privacy, data protection and insolvency laws. So the elimination of regulatory differences was seen as too difficult for governments and regulators and their existence as advantageous for the major banks.
Chris Rees added: 'At Charteris our experience of working with clients in the sector led us to believe that these supposedly imminent changes were much more remote than this. The survey has shown beyond question that with market inefficiencies actually generating revenue for investment banks, not only do these banks have minimal motivation to change but they are actually motivated to retain the status quo. This is in a sense an alarming conclusion and one that regulators and governments need to consider very carefully.'
Copies of the survey report are available for GBP125 from Sam Broome, Charteris plc, Charteris House, 39-40 Bartholomew Close, London, ECIA 7JN, T: 020 7600 9199 F: 020 7600 9212 E: info@charteris.com
