Summary
The distinctions between exchanges and brokers are getting blurred. Expect unlikely matches as well as confrontations.
Analysis
The news that broke today that the London Stock Exchange apparently held talks with interdealer broker ICAP simply confirms that the distinctions that used to exist between exchanges and brokers are getting more and more fuzzy.
Recall, too, that Man group - futures broker and hedge fund manager - bought Eurex US from Eurex AG. It used to be an exchange, now it's a broker! And what difference does it make?
In Europe, MiFID, which comes into effect in November 2007, will open more opportunities for brokers to internalise orders, creating the category of "systematic internalisers".
We will have to get used to think of exchanges and brokers as occupying different points along a spectrum, rather than being completely distinct entities. They will differentiate themselves by which clients they choose to focus on, how publicly they choose to conduct their business and what they choose to call themselves. (And of course the regulators will continue to try to put them in different boxes.)
This breaking down of barriers will certainly create more confrontations but it will also surely open up possibilities for more imaginative matches to be made between organisations that we used to think were separated by impenetrable barriers.
