24 August 2017

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Absolute power corrupts

31 July 2007  |  2329 views  |  0

I was reading Chris Skinner’s blog on “How the media changes reality”, and had to pick up on the topic of bullying.  Having been a short, bespectacled kid with asthma (as opposed to now being a short, bespectacled adult without asthma), bullying is always something that gets to me – not because it happened to me, but when I watch people try to do it to others it makes me very angry.

Chris mentioned that he couldn’t “think of many service organisations that could get away with treating the customer this badly as the customer would leave ... apart from maybe the gas and electricity services, the telephone and broadband firms…”.  I have to pick up on that one because the world has changed from when we were kids.  Today I buy my gas from an electricity company, my electricity from a gas company, I don’t rent my phone from the GPO any more and I have two broadband suppliers. 

One example of “bullying vendors” that still doesn’t seem to be changing is the attitude of European exchanges, though.  They have been given a national monopoly on trading and market data for so many years that it obviously must hurt a lot to lose it.  It’s not just MiFID that will change things – it’s also hopefully a growing awareness by national market regulators in Europe of what the business practices of many exchanges actually are.

 In February this year, CESR issued its guidelines for the publication and consolidation of MiFID market transparency data.  Guideline No.9 states “CESR considers that RMs, MTFs, and investment firms should not make the supply of pre- and post-trade information conditional on the purchase of other bundled services.”  This is a guideline written by the national regulators for use by the national regulators.

In most industries, a regulator wouldn’t have had to write this because “bundling” is fundamentally illegal.  It’s covered in national and international law.  However in the financial services business, many European exchanges have been bundling their services for years, and clearly intend to continue to do so for as long as they can bully customers into paying up.

Only last week I heard of two more European exchanges stating their black-and-white policy that customers who want to receive pre- and post-trade data from the exchange also have to buy a network service from the exchange – and from nobody else.  Bundling doesn’t come much clearer than that.  It’s pretty much standard practice among European exchanges.  And no market regulator today does anything about it.

MiFID is just three months away, and it is going to be interesting to see whether the regulators will use their teeth on the exchanges as well as on investment firms.  As exchanges have had to reduce their membership fees to attract more members, and to reduce their transaction fees to attract more order flow, additional revenues from market data and network provision have become very important to Europe’s exchanges.  Like the free lunch that the bully takes away from the other kids.

Regarding their bundling of services, the exchanges’ general attitude appears to be “I’ll do whatever I want to do – what are you going to do about it?”  Do the exchanges have absolute power?  Will the regulators turn a blind eye?

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