Exchanges: Where Now For The Exchanges Sector?
By Roger Aitken, Associate Analyst B.I.S.S. Research
Bumper profits. No one can say they would not like to share in such spoils in these times of uncertainty, with the Euro
zone appearing to be pulling itself apart over Greek woes and the U.S. economy posting a huge current account balance (read
deficit) of -US$473.4bn (a minus!) for the latest 12 months.
might appear counter intuitive, the exchange sector could provide that relative safe haven over the medium to long term. That
said, one cannot ignore the fact that 2011 saw quoted stock exchanges in Europe, North America, Latin America and in Asia
Pacific perform dismally in terms of share price action. Interestingly heightened volatility on the markets due to economic
uncertainty has played to some exchanges.
According to the FTSE Mondo Visione
(FTSE MV) index, a specifically constructed index tracking share price movements of listed exchanges globally, a slight recovery
in the sector has been seen in Q1 2012 to the end of April, with a +8.5% increase in US dollar terms. Some observers might
have thought the sector was oversold and a correction due. It's still a mixed picture.
Currently, the FTSE MV index is composed of 23 constituents and spans exchanges like the Australian
Stock Exchange (ASX), Johannesburg SE, London Stock Exchange Group (LSEG) and the Warsaw Stock Exchange. In addition to ASX,
there are six other quoted exchanges across the Asia-Pacific region in the analysis: Bursa Malaysia, Dubai Financial Market,
HK Exchanges & Clearing, the Multi Commodity Exchange of India, NZX and the Singapore Exchange.
In the normally frenetic world of daily equity and derivatives trading, when it comes to takeovers
and M&A moves the sector has recently been beset by problems in pulling off deals. To some extent the landscape has been
bogged down by concerns from the regulators over market share concentration in certain securities trading segments. This was
so with recently aborted merger between Deutsche Boerse (Frankfurt) and the NYSE Euronext, which fell foul of EU regulators
Elsewhere, a tie-up between the LSEG and Toronto Montreal
Exchange (TMX) ran into opposition from Canadian investors (under the Maple Consortium), wishing keep TMX in Canadian hands.
And, while incumbent exchanges in Europe - Deutsche Boerse, LSEG and NYSE
Euronext (incl. Paris, Amsterdam, Brussels and Lisbon) - have faced growing competition in recent years from new exchange
entrants - Multi-Lateral Trading Facilities (‘MTFs'), the incumbents have successfully mounted a rear guard action.
Many MTFs have either closed down, just about broken even in a few cases or been acquired. BATS Trading's takeover of
Chi-X in Europe is an example of the latter.
And, PLUS Markets Group, which
has Recognised Investment Exchange (RIE) status agreed on 18 May 2012 to sell its exchange platform for just £1 cash
to ICAP - subject to approval. It intends to try and secure some value from its other assets for shareholders.
Other leading incumbents like the LSEG are operating now with a foot in both camps, having
acquired Turquoise, an MTF and hitherto a rival. So, now they offer equities and derivatives trading on three markets: London,
Milan (through Borsa Italiana) and Turquoise. For overall FTSE 100 trading volume, Turquoise now accounts for c.10% of the
market while LSEG has around 60%.
These different segments cater for different
end clients and types investor activity - on platforms developed by Millennium IT, a Sri Lankan software firm based in Colombo,
an LSEG owned firm.
One of the key aspects behind LSEG's
recent success is that cutting-edge IT through Millennium IT software and new platform upgrades has driven equity and derivatives
volumes to new levels. The technological improvement has been profound in terms of trading speeds (aka ‘latency')
This is touted on LSEG's new platform to be ten times (10x) faster and ten times cheaper. It's also been a story in
delivering growth and a diversification strategy, with what is described as "scale, scope and reach of Group transformed
through organic growth and acquisitions."
Migration to the Millennium
Exchange (i.e. new LSEG platform) towards the end of Q1 2011 saw latency fall from 1.4 to 1.7 milliseconds to below 0.2 milliseconds.
Just months later (19 August 2011) volume on the system hit a record 109,537,950 orders - up from an average of 40m-50m daily
trades for most of H1 2011.
Perhaps unsurprisingly total income across
the whole LSEG business in the 12 months to the end of March 2012 came in at £814.8m (+21% over a year before). Much
of this has been fuelled by high frequency trading and algorithmic activity, which is accounting for an ever growing per centage
of all trading. This is a similar picture to that on NYSE Euronext with its Universal Trading Platform and on Deutsche Boerse,
Eurex - as well on North American exchanges.
The exchanges sector might
not have recovered to the heady levels seen on 24 December 2007, when LSE shares were trading at £19.56 a pop - compared
to around £10 each this May. Over a 5-year period to date the exchange's share price has declined 27%, although
this is a mild deterioration compared to many other FTSE 100 shares.
it's very much a case of buyer beware and selecting options. Given that the exchanges business is a volume
game and about scale in a global context, more mergers cannot be discounted. But the $64m question remains who is next in
line and how such deals are to be executed.