* Review will look at vertically-integrated exchanges
* Co-location used by high frequency traders also looked at
* Asset management part of review, insurance left out (Adds more detail, comment)
By Huw Jones
LONDON, July 9 Britain's financial watchdog is launching a broad "exploratory" review of competition in the wholesale markets used by banks, fund managers and exchanges to check if they operate effectively to help the economy and give their customers a good deal.
The Financial Conduct Authority (FCA) was set up just over a year ago as part of Britain's post-financial crisis shake-up of supervision to protect consumers better and increase competition in markets.
Mary Starks, director of competition at the FCA, said on Wednesday the watchdog had launched a review of competition in wholesale financial markets. These markets are where financial institutions, big companies and governments go to raise money, and cover stock exchanges as well as bond and derivative trading by banks, brokers and asset managers.
The FCA review will include an examination of wholesale banking - banking services that are provided between banks and to other types of financial institutions.
Starks said it was an exploratory exercise to determine where competition may be weak.
"And why is it important? Because wholesale financial markets play a crucial role in the economy, and the UK plays a key role in the international markets," Starks told a meeting of the Chartered Institute of Securities on Wednesday.
The FCA has already begun using its muscle to step up consumer protection with bigger fines and Wednesday's announcement signals how it intends to use its clout in the area of competition as it builds up staff in this area.
"The new competition folk at FCA seem to be on steroids," said Paul Edmondson of law firm CMS.
"Competition is the current buzz-word for intervening in financial services. This is another addition to the regulator's growing shopping list in areas such as insurance and credit cards," Edmondson said.
The review will cover markets, their infrastructure, asset management, and corporate and investment banking, but not credit rating agencies, payment systems and insurance, Starks said.
While wholesale market players are typically more sophisticated that those in the retail sector, fines for banks that rigged the Libor interest rate benchmark showed that the impact of poor conduct in wholesale markets can be significant, she said.
The review will be separate and wider that the study of trading practices and conduct being conducted jointly by the Bank of England, FCA and the finance ministry following allegations that currency markets have been rigged.
Starks said that the FCA's remit to promote effective competition meant being proactive in rooting out competition issues rather than waiting for problems to occur.
One area it will look at is cross-selling and bundling of products and services to ensure that competition in one service does not suffer in order to promote another service, she said.
"The review describes various areas where this market feature might exist; from investment banking, to asset management, to trading venues and clearing houses that are vertically integrated," Starks said.
Vertically integrated groups offer the whole transaction chain for securities, from trading to clearing and settlement.
Some big investors have complained about not having choice of clearing house for their derivatives transactions when they trade on a particular exchange, especially as new rules mean that more trades will have to be cleared.
The review will also look at potential conflicts of interest in providing investors with the best share price in the market, and the underwriting of equity and debt.
Barriers to entering or expanding a market will also feature in the review, which could include the preferential access of so-called co-location - used by high-frequency traders (HFT) to place their servers next to an exchange in order to benefit from the fastest trading speeds.
Critics say such access, for a premium, gives an unfair advantage over other investors, and U.S. authorities are already investigating the practice.
The review will examine whether incentives are in place for asset managers to pay the correct price for the correct level of service, such as in relation to dealing commissions.
The FCA is first asking for comment on potential competition issues from industry and the public until Oct. 9 and begin work on any detailed market study in early 2015.
Any studies would coincide with the even stronger competition powers the FCA will get next April to enforce domestic and European competition law and impose fines.
It will also be able to refer any competition issue to UK's main competition regulator, the Competition and Markets Authority, which has sweeping powers to make extensive changes to markets. (Reporting by Huw Jones; Editing by Louise Heavens and Pravin Char)