Equiduct Challenges Project Boat

LONDON—Although Project Boat has been recently hailed as the answer to one of the key Mifid reforms to come on Nov. 1, 2007, the initiative is facing challenges from the newly created Equiduct as well as from other exchanges mulling their own offers.

Project Boat is slated to provide in a post-Mifid world pre- and post-trade reporting of off-exchange, over-the-counter (OTC) equities transactions. The Project Boat group, officially announced in September, is a consortium of nine investment banks—ABN Amro, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Merrill Lynch, Morgan Stanley and UBS—declaring that they would collaborate to construct a system for posting off-exchange OTC equities transactions (DWT, Oct. 23). Officials at these firms decline to comment for this story.

Currently, the off-exchange postings must be reported via regulated markets, such as the London Stock Exchange (LSE) and other European equivalents. However, Mifid removes such concentration rules, permitting the development of alternative venues for reporting (DWT, Oct. 23).

Earlier this month, Bob Fuller, former global head of IT at Dresdner Kleinwort, announced he was joining Equiduct as CEO (DWT, Nov. 6). Equiduct, which aspires to become a fully regulated pan-European exchange, was formed out of Easdaq.

Starting April 1, 2007, Equiduct will offer pre- and post-trade transparency, a hybrid book, a quoting facility and best execution capabilities for equities as an answer to Mifid. The directive will allow organizations to use a single pan-European exchange rather than having to trade in all 29 national exchanges, according to Equiduct. European exchanges such as the LSE, Deutsche Börse and Euronext do not list all European stocks (DWT, Nov. 6).

"As a regulated exchange, we have to provide pre- and post-trade transparency and it's not our main business," says Fuller. "We'll be in there offering the services that Boat does—so I can't see how it will be the predominant provider—and I don't think we will be. I think there will be all of us in the middle offering low-cost provision of services."

With Equiduct offering the same services as Project Boat, a majority of the nine banks involved in the consortium are reportedly talking to Fuller. However, Fuller says, "It is too early to comment." In a previous interview, Fuller assures that he is "happy to talk to Project Boat, but we think we offer more than [what they offer]."

All in all, Equiduct is touting its independence. "I think Project Boat is a very interesting tier-one play," Fuller says. "But a number of things strike you as soon as you mention nine tier-one banks. They always have their own view on how they're going to do something and are always trying to outdo the other one. It's going to be difficult for them to remain focused on providing something in the center and not have each of them trying to make their own play. Socially, they have a problem—hopefully they can get through that," he says.

Fuller also says that the consortium might have difficulties marketing its offer to other smaller banks. "Being owned by nine tier-one banks and then going out to the smaller banks in Europe—bearing in mind most of those [tier-one banks] are American or British—makes the sales process quite complicated," he says. "Our sales force runs out of Belgium. We're a Belgium-regulated entity. We have offices in Belgium, so we're European."

Fuller also explains that other exchanges, such as Euronext and Deutsche Börse are rumored to be mulling pre- and post-trade reporting services of their own.

Officials at Euronext and Deutsche Börse decline to comment upon rumors.

While the competition is hard at work, Project Boat's backers have to select a technology provider for its trade reporting platform. OMX, the Swedish exchange operator and technology vendor, is said to have been in the running, according to sources close to the proceedings.

However, OMX officials decline to comment further on that possibility. "We send a press release when we sign new major deals, and we have not sent any press release about cooperation with the organization (Project Boat)," says a spokesperson from OMX's business area market technology division. "As a supplier of technology to over 60 exchanges in more than 50 countries, we speak to many stakeholders in the industry. But, beyond that, we refrain from commenting."

Moreover, Project Boat also needs to meet regulatory requirements.

"The Boat request for proposal (RFP) was limited to the technical platform," says Paul Pickup, IT consultant with Trading Technology. For example, Project Boat may need to gain recognized investment exchange (RIE) status. If it does, "it needs to set rules, membership criteria, guarantee funds—it has to meet a whole stack of regulations," says Pickup.

Equiduct will operate on a modified version of the European trading platform (ETS) used by Easdaq, Nasdaq Deutschland and Nasdaq Europe. The platform has been adapted to the Mifid guidelines, according to Equiduct. Fuller is touting turnaround times of less than 10 milliseconds for its clients.

The technology behind ETS is originally from Tibco and Reuters and was later customized by Nasdaq, Fuller says. "It's going to remain as it was. Some of the underlying products have been upgraded. There are a couple of components where there are newer ways of doing things that can speed up certain parts of the process. You'll do that over time—but overall, 95 percent of the technology was deployed before and worked very well," he says.

Olivier Laurent with Jean-Paul Carbonnier