Europe's financial markets are unlikely to iron out inefficiencies in clearing and settlement while the major market players continue to benefit from fragementation, according to research from Charteris.
The survey, "European Financial Markets 2001 - Revolution or Evolution?" was undertaken by business and information technology consultancy Charteris, to assess the current state of the European financial markets from a London perspective. Interviews with leading London-based market participants took place between June and September 2001, before 11 September.
The survey's findings 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.
Chris Rees, a director of Charteris and head of the team which undertook the survey, comments: "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."
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.
Interviewees also believe that a European stock exchange 'premier league', consisting of the current big three exchanges, London Stock Exchange, Euronext and the Deutsche Boerse, will 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, says the report.
Their dominance is unlikely to be ruffled by Electronic Communications Networks. Survey respondents do not believe that the equity and derivatives markets exhibit the same inefficiencies that afford ECNs such comprehensive opportunities in the USA.