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Globalised trading moves a step closer

The news that the London Stock Exchange (LSE) and the Canadian Stock Exchange TMX was rapidly followed by an announcement that NYSE Euronext and Deutsche Börse are also to merge.

Equally, we’ve seen the Singapore Exchange SGX trying to acquire the Australian Exchange ASX, along with many other movements towards consolidation.

I’m not going to comment too much here, as the FT has gathered the views of the great and good, so here’s the world’s view:

On consolidation among exchanges

“The M&A trends that we are witnessing are global; after SGX [of Singapore] attempted to acquire Australia’s ASX, and LSE and TMX had discussions, there should be no doubt. The race is on to create regional trading gateways to serve international institutional investors, and the drivers are accelerating,” said Axel Pierron, analyst at Celent, a consultancy firm.

“The merger would produce the world’s second largest exchange, spanning the US and European equity markets and dominating the derivatives space in Europe, leaving Asia as the only major market region left to conquer. With the LSE and TMX pursuing a similar strategy, I believe this will spark a wave of inter-regional ventures between execution venues,” said Simmy Grewal, market structures analyst at Aite Group

The combination of the futures business

“They would have a CME-like European futures franchise, dominating the short and long end of the rate curve,” said Ian McDonald, exchanges analyst at T Rowe Price, which is the largest holder of NYSE Euronext shares at 9.4 per cent as of their last report.

“Strategically, it makes sense. They are similar companies in a lot of ways, and both need to shore up European equities businesses. It also completes the yield curve spectrum in terms of interest rate futures. NYX is short end, Deutsche Börse is long end. Any time you bring together a pair of exchanges, there are a lot of cost synergies,” said Patrick O’Shaughnessy, exchanges analyst at Raymond James.

Antitrust

“If you are combining Liffe with Eurex, there’s going to be a lot of regulatory havoc,” said Diego Perfumo, exchanges analyst at Equity Research Desk.

“Antitrust questions are the first ones the companies have to be asking. I don’t know if they could get this far down the road without having a plan for that,” said Mr McDonald.

Technology

“Deutsche Börse has over 1,000 people in technology. Now, they could add that to the Basildon centre, and create a serious company that provides technology separate from the exchange,” said Mr Perfumo.

The challenge in equities

“Cash equities is all about economics of scale to compete against the MTFs. You need to be the lowest-cost provider,” said Mr Perfumo.

“The introduction of regulations and alternative trading venues has had an impact on incumbent exchanges and put pressure on them to expand their businesses not only by asset class but also by region,” Ms Grewal said.

Clearing

“It’s unmistakable that clearing is more important than a few years ago and NYSE Euronext realises its current model isn’t as efficient as it could be. By merging with Deutsche Börse, which runs a vertical operation through the entire trading process across equities and derivatives, it would help them to create a more efficient and cost-effective clearing business,” said Ms Grewal.

The trading floor

“I’m hoping that with a merger like this, it will be opportunity to trade globally right from the floor. A 24-hour operation never happened after the Euronext deal, but this may change the outlook,” said Kenneth Polcari, a managing director at ICAP and NYSE floor trader.

 

What I will say is that a lot of this does remind me of the last spate of merger-mania when NYSE and Euronext came together in 2007, and the move back then towards globalisation of trading with rumours that Mumbai and Shanghai would also join the consolidation route.

We also had the long and ongoing battle to buy the LSE back then, with NASDAQ and Macquarie bidding up the share price to almost £20 a share at one point … I remember a friend back then saying he thought it wasn’t worth more than £2, although he proved to be wrong as it sank to just £4.

This was all between October 2007 and March 2009, as the impact of Chi-X and other new entrants to the electronic equities trading space hit.

With no real alternative to equities trading at the LSE, they were struggling.

Then Clara Furse left; Xavier Rolet came in; Turquoise was acquired; as was the Italian Borsa; along with Millennium IT … and everything starting to improve again.

So much so that LSE is now trying to become global, as the trend towards global trading platforms emerge.

Bear in mind that this is not just a play by the large exchanges, but also by the MTFs with BATS and Chi-X both having significant pan-regional footprints across the world too.

So where do we end up?

Probably with a few firms by 2020 who offer a globalised straight through process.

Like the GSTPA (remember them?) we move towards Global STP thanks to trading platforms, with GNX (Globalnext), Chi-X and GSE (Global Stock Exchange) as three key systems offering everything from matching through execution to clearing and settlement.

Ridiculous you may think, but it’s already being mooted by some and, looking at the monthly MiFID monitor trends, here’s an interesting analysis:

                                                       February 2010                January 2011

         Venue                                                     % share EURO

  1. Chi-X (1)                           16.04%                               16.37%
  2. Xetra (3)                           12.52%                               13.04%
  3. ENX Paris (4)                     11.63%                                11.14%
  4. LSE (2)                              13.49%                               10.88%
  5. Italy (5)                               8.09%                                8.98%
  6. Mercado Continuo (7)           6.91%                                7.01%
  7. SIX Swiss (6)                        7.30%                                6.65%
  8. BATS (8)                              4.42%                                6.45%
  9. ENX Amsterdam (9)              4.58%                                4.43%
  10. Stockholm (10)                    3.97%                                3.65%

As can be seen, a pure equities platform like LSE was easily open to attack. Xetra (Deutsche Börse) and ENX (Euronext) survived better because they have equities, futures and clearing.

Some would call the latter a lock-in, and that’s important too if you’re trying to win in the new game of trading.

Also worth noting above the rise in volumes on BATS. A 2% increase in a year may sound small, but that’s a 50% expansion in their footprint. One to watch.

Even more interesting is the change in the dark pool landscape.

                                                              February 2010              January 2011

              Venue                                                % share EURO

  1. Chi-X (1)                                   30.52%                                28.04%
  2. Turquoise (5)                               9.36%                               21.32%
  3. BATS (2)                                    17.47%                               12.08%
  4. Nomura NX (4)                           11.43%                                11.05%
  5. Liquidnet (3)                             13.80%                                10.90%
  6. Smartpool (8)                              1.87%                                 9.14%
  7. POSIT (6)                                    9.33%                                 4.37%
  8. Instinet BlockMatch (7)                 2.69%                                 2.38%

Note the increase in Turquoise’s stake at the expense of BATS … so BATS is getting more low latency trading in lit markets?

Also, the rise of Turquoise can be put down to the LSE acquisition maybe, but the other big riser is Smartpool. Wow – from under 2% to over 9% of dark trading. Another one to watch.

All in all, this tells me that you have two types of play: the pure electronic space (Chi-X and BATS), and the more fully functional STP play (LSE, ENX, Deutsche Börse).

It will be fascinating to watch, as these firms globalise, which players win which games.

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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