Bypassing The London Stock Exchange
IBs Ganging Up To Bully LSE

The top investment banks are co-operating on plans to build a new system for reporting equity trades that would bypass the London Stock Exchange and other European bourses. Ten banks, including Merrill Lynch, Citigroup, Deutsche Bank and UBS, are working together on the cryptically code-named Project Boat. They are looking to take advantage of changes to the rules governing the reporting of trades due to come into force next year under the EU market in financial instruments directive. At present, all trades must be reported to a recognised exchange whether or not its system was used for the transaction. The LSE and other exchanges charge brokers for this service and also for access to the trading data they then provide.

Under the new directive, brokers will be able to report trades to any registered entity, opening up this area of business to competition. The 10 banks, which between them dominate European equity trading, are equal partners in the plan and are working on a letter of intent. They deal with all European bourses, and believe Project Boat would be simpler, and deliver them greater control at lower cost. IT companies were invited last month to pitch to build and support the new system. Apparently the contract had been won by the Swiss-owned exchange, Virt-x. Project Boat is understood to be at a very early stage and unlikely to come to fruition before next year. Two banks that have not signed up to it are Lehman Brothers and JP Morgan, the LSE's corporate brokers.

Revenues from the LSE's broker services division, which were £125m last year, constituted some 43 per cent of overall sales. They would be sure to suffer should Project Boat deliver. Last month, the LSE revealed that record trading volumes in the first three months of its financial year contributed to revenues of £84.3m, 25 per cent higher than at the same time last year.