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Last Updated: Tuesday, 14 November 2006, 22:06 GMT
Banks to launch EU share market
Robert Peston, BBC News business editor
By Robert Peston
Business Editor, BBC News

Share trader
Banks are worried about trading costs
The world's biggest investment banks are to create a new pan-European system for trading shares to rival Europe's top stock exchanges.

They intend to create a system "within months", before a new EU directive on trading in financial products comes into force next November.

They believe they are paying too much to the London Stock Exchange (LSE) and other European markets to trade shares.

"The cost of trading in the US is 80% lower than in Europe," said a banker.

The new business will be owned by US firms Citigroup, Morgan Stanley, Goldman Sachs and Merrill Lynch, Swiss banks UBS and Credit Suisse, and Germany's Deutsche Bank.

Secret meetings

They have been meeting in secret for months to plan their new market, always under the scrutiny of a leading London law firm.

"We've always had lawyers present, so that no-one could accuse us of anti-competitive collusion," added a banker.

We think the resistance of individual European countries to what we want to do is less than it has ever been
Investment banker

They believe that competition from their new system will drive down charges and also deliver keener buying and selling prices.

That would benefit the many millions of people who have savings in a pension funds or investment schemes, because it would reduce the trading costs of those funds.

The new system would almost be guaranteed vast amounts of business, because the seven banks estimate that they are responsible for 50% of all trading in leading European companies.

The value of such transactions would run to many hundreds of billions of pounds every year.

LSE threat

The initiative may be a particular concern to the LSE, which has been building its defences against an expected takeover attempt by Nasdaq, the US exchange.

Nasdaq owns 25% of the LSE and has made plain its desire to buy it outright.

The LSE's ability to remain independent would be undermined if it were perceived to be weakened by the investment banks' determination to compete with it.

LSE headquarters
The London Stock Exchange could find its business under threat

The banks are partly motivated by the coming into effect of the new Markets in Financial Instruments Directive (mifid).

This directive actively encourages the creation of competitors to the domestic exchanges, which have effectively been monopolies since their creation.

"We think the political climate is right, that the resistance of individual European countries to what we want to do is less than it has ever been," said one leading investment banker familiar with the plan.

Cost frustration

Another factor is that the investment banks believe they have been paying too much to the LSE.

They have seen business on the exchange surge over the past two years and they feel that the LSE has not cut its charges sufficiently to take account of all the extra business they are winning.

"We've seen business at the exchange go up and up, and its share price go up and up," a banker said.

"And we've thought to ourselves - we're paying for that. That's our money going to the LSE".

The new trading system will be a competitive threat to the LSE, Germany's Deutsche Boerse and to Euronext, the Franco-Dutch stock market business.

There have been attempts in the past to create new exchanges and trading systems, but none of them have succeeded.

But the banks believe theirs will take off, in part because the pressure for lower charges has intensified following the explosive growth in share trading by hedge funds.

The banks are currently refusing to quantify the costs of the new system and some may see their plans as simply an extreme way to force European exchanges to cut their charges.

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