PROFITS at the London Stock Exchange are being threatened by a plan by the City’s biggest banks to build a rival trade- reporting system.

Ten City banks, thought to include UBS and Merrill Lynch, are believed to be holding preliminary talks about setting up their own trade-reporting system in the wake of the introduction of the Markets in Financial Instruments Directive (Mifid), which is due for implementation in November 2007.

The directive will drop the requirement for all trades to be reported through the LSE or virt-x, its smaller rival, even if the trade is not transacted through the exchanges. According to analysts, up to 40 per cent of equity trading in London is not put through the LSE. Instead, banks deal directly with each other.

Some City firms are thought to be irritated by the fact that the LSE charges for information on trades that is provided by the banks.

The trading information is used on a daily basis by the City’s big share-trading houses. The LSE does not break out the revenues it earns from trade reporting. One analyst estimated that it was about 10p per bargain struck — about £9 million in annual revenue from nearly £300 million in turnover.

The LSE itself said that, contrary to being a threat, the arrival of Mifid was an opportunity to grow its own revenues by poaching business in trade reporting from other European exchanges.

A spokeswoman said: “We would expect them (investment banks) to look at the other options available. Trade reporting is quite a small part of our broker services revenues.” She added that the LSE was “confident” that it had the infrastructure in place to offer banks a suitable trade-reporting service.

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