Memorandum submitted by virt-x
1. I am writing in response to your letter dated 18 December regarding the Treasury Committee ("the Committee") hearing on the proposed takeover of the London International Financial Futures and Options Exchange ("LIFFE") by Euronext NV.
2. Whilst having no direct involvement in the proposed takeover, we feel that virt-x has a unique view on the developments in the European capital markets because we are the first and only truly pan-European equity market and the first and only Exchange to move a national equity market to another location.
BACKGROUND TO VIRT-X
3. virt-x Exchange Limited, a wholly owned subsidiary of virt-x plc, is a Recognised Investment Exchange supervised by the Financial Services Authority and is a regulated market under the Investment Services Directive. Based in London, virt-x was created in February 2001 through collaboration between Tradepoint Financial Networks plc (now renamed virt-x plc), the TP Consortium (TP Group LDC) and SWX Swiss Exchange to provide an efficient and cost-effective pan-European blue chip market. Full details of the virt-x proposition are contained in Appendix 1.
4. 2001 was a pivotal year in the development of Europe's financial market infrastructure in that many of the traditional exchanges throughout Europe converted into publicly traded companies. As well as the creation of virt-x, there were Initial Public Offerings by the London Stock Exchange ("LSE"), Euronext and Deutsche Börse. Furthermore, SWX has announced it will change its corporate structure to a company owned by its members and Borsa Italiana is expected to complete its own public offering early next year. Stockholm Exchange is already publicly traded via the OM Gruppen listing.
5. The importance of the change in governance structure on a pan-European level cannot be underestimated for the following reasons:
(a) These organisations are no longer quasi-governmental entities or mutual clubs, but commercial entities answerable to shareholders like any other corporation; and
(b) Access to acquisition currency, as we have seen, increases the chance that the much needed (and previously elusive) consolidation of the industry infrastructure will finally take place.
6. The proposed takeovers of LIFFE by Euronex and of Clearstream by Deutsche Börse are the most recent examples of consolidation in our industry at this time. Each can be expected to have a very different impact on the future of securities trading and equity investment in the EU.
IMPLICATIONS ON THE INDUSTRY
7. In our opinion, "horizontal" consolidations are beneficial to the European Financial Services Industry as they produce economies of scale and network benefits without the constraints on competition and innovation imposed by "vertical" integration.
8. We feel that it is worth noting, however, that the integration of European securities markets will ultimately require more than the mere consolidation of existing markets. The simultaneous trading of securities on competing markets will no doubt remain a feature of the European markets for some time to come. The resulting "fragmentation" of liquidity poses the danger of impeding the interaction of orders, thus impairing the price formation process to the detriment of investors. We believe that efforts should also be undertaken to establish linkages among competing markets, in the form of a consolidated order and quote montage, a consolidated tape and a pan-European best execution policy.
9. In contrast, vertical silos do not provide a solution to the challenge facing European capital markets to reduce the costs of cross-border trading, because participants require multiple clearing arrangements, multiple collateral pools, and a network of settlement agents.
10. virt-x therefore wholeheartedly endorses the findings of the Giovannini report, in that fragmentation in the European clearing and settlement infrastructure complicates significantly the post-trade processing of cross-border securities transactions relative to domestic transactions.
IMPLICATIONS ON THE UNITED KINGDOM
11. We are also of the opinion that the United Kingdom (London in particular) will remain the home of the European cross border financial services industry and the potential takeover of LIFFE by Euronext will have no detrimental effect on the UK financial services industry. Primarily this is because any serious pan-European financial services provider will want to base its operations, or to maintain a considerable presence, in London due to the following factors:
(a) London has a number of competitive advantages over its competitors, particular its skilled and technically advanced labour pool.
(b) Its reputation for fair and effective regulation.
(c) The demand for cross border and pan-European financial services is increasing exponentially, particularly as investment strategies evolve towards sectoral trading.
(d) The world's investment banks (ie the largest participants in equity and derivative transactions) have either centred their European operations in London, or at the minimum conduct all pan-European trading from their London offices.
(e) Location and language.
12. We would add, however, that London does need to strengthen its position by reducing the impact of capital gains tax and stamp duty on equity transactions.
13. We hope that this letter is of use to the Committee and are willing for its contents to be made public.
Overview of virt-x
1. virt-x Exchange Limited, a wholly-owned subsidiary of virt-x plc, is a Recognised Investment Exchange supervised by the Financial Services Authority and is a regulated market under the Investment Services Directive. Based in London, virt-x was created in February 2001 through collaboration between Tradepoint Financial Networks plc (now renamed virt-x plc), the TP Consortium (TP Group LDC) and SWX Swiss Exchange to provide an efficient and cost-effective pan-European blue chip market.
2. virt-x was created in response to market demand for an efficient and cost-effective pan-European blue chip exchange to support the rapid growth in European cross border trading. The level of cross border trading in European blue chips has been forecast to increase at 45 per cent compound per annum.
3. The virt-x market is based on an integrated trading, clearing and settlement model which will not only simplify the process of trading pan-European blue chips but will also significantly reduce the costs associated with trading cross border at every stage of the process. Orders are posted anonymously in the order book and matched automatically in price/time priority.
4. virt-x supports trading in the equities which comprise the major European blue chip indices. These are currently the 620 stocks that make up the AEX, CAC 40, DAX 30, DJ Stoxx 50, DJ EuroStoxx 50, DJ Stoxx 600, FTSE 100, FTSE Eurotop 300, IBEX 35, MIB 30, MSCI Euro, MSCI Pan Euro, S&P Europe 350 and SMI.
5. Connectivity to virt-x is flexible. Members can connect directly to virt-x or through an Independent Software Vendor (ISV).
6. SWX Swiss Exchange and the TP Consortium each hold approximately 38.9 per cent of the issued share capital of virt-x plc. The TP Consortium comprises ABN AMRO Equities (UK) Ltd, American Century Investment Management Inc, Archipelago LLC, Credit Suisse First Boston Equities Ltd, Deutsche Morgan Grenfell, Dresdner Kleinwort Wasserstein, Instinet UK Ltd, JP Morgan Securities Ltd, Merrill Lynch International, Morgan Stanley Dean Witter and UBS Warburg.
7. For further information, including a complete list of members, please see http://www.virt-x.com.