BRUSSELS, Aug 27: New European Union rules to spur competition in trading shares across the 25 nation bloc threaten smaller stock exchanges as banks eye their business, the Federation of European Securities Exchanges said.

The EU is consulting on how the new rules, known as the markets in financial instruments directive (MiFiD), should be applied when introduced in 2007.

As part of sweeping changes to how shares will be traded in Europe, banks will be allowed to trade shares internally in-house, rather than having to go through an exchange as is the case in many EU countries at present.

For shares that national regulators deem to be “liquid” or widely-traded, banks will have to publish the prices at which they intend to trade the stock in-house so that everyone in market is aware of price levels.

FESE said in a statement that the definition of a liquid stock will be crucial.

“Internalisers would like to have a very high threshold. That would qualify many shares as illiquid and exempt from transparency,” FESE said.

The fear is that this would suck volumes of “illiquid” shares away from exchanges.

FESE is also worried about a proposal for public offerings in the new rules which states that any new listing cannot be considered to be liquid in its first six months, regardless of how big the float is.

The proposals could have a detrimental effect on the transparency of initial public offerings as well as on the survival of smaller exchanges, FESE said.

MiFiD was due to be introduced in 2006 but was delayed a year after banks and exchanges complained it was too complicated and burdensome to introduce according to the original timetable. —Reuters