The spate of mega-mergers and competition among the world’s biggest exchanges continues, despite the move by European regulators to ban Deutsche Börse (DB) and NYSE Euronext (NYX) from forming the world’s biggest exchange. Both are stepping up activities in selling exchange technology and looking at other new directions.
According to a report in the Wall Street Journal, both see their independent futures driven by selling technology and market services to other exchanges and traders, in competition to other exchange technology providers CME Group Inc., Nasdaq OMX Group Inc and London Stock Exchange Group PLC (LSE) – the last two have systems running in more than one African exchanges. DB systems are in use in exchanges in Ireland, Slovakia and Austria, and markets in Japan, Qatar and Poland use NYX technology.
NYX has said it plans to more than double annual revenue from its technology arm to $1 billion by 2015. DB said it would create a new information-technology and data unit to extol the virtues of German engineering by consolidating its existing services in supplying price data and other market information into a new unit that will also export the systems that run the German company’s stock and derivatives markets. Together the businesses last year contributed about €92 million ($120.4m) of DB’s €2.3 bn in revenue. Chief Executive Reto Francioni said: “In the process, we can bolster our technology leadership, strengthen customer relations and pack a more powerful punch overall.”
The article comments: “The world’s major exchange operators have in recent years viewed the sale of technology services and data as a growth driver, mitigating the ups and down of trading fees. Selling the hardware that powers trading and back-office services is also a useful path for tapping growth in emerging markets. Russ Chrusciel, head of derivatives risk-management services for trading technology company SunGard, is quoted saying: “Exchanges today at their core are technology companies. What used to be a crowd of several hundred people on a trading floor has turned into a conglomeration of buildings, servers and technology architecture.”
LME in the target zone
By today (24 Feb), key metal traders were starting to voice objections to the planned sale of the London Metal Exchange. NYX is said to be on the list of potential bidders who also include CME Group, Hong Kong Exchanges and Clearing Ltd and the InterContinental Exchange. According to a Reuters story, Stefan Boel, board member of Aurubis, Europe’s largest copper producer, said: “”People are getting blinded by the dollars and euros which they can make out of it. It’s all about the valuations of the LME and possible profits. But we’re forgetting the fundamental fact that the LME was set up as a body for price discovery and risk protection for the non-ferrous metal industry. It has a true industrial purpose.” LME contracts allow participants at many stages of the metal-supply chain, including miners, smelters, fabricators, merchants and consumers, to hedge against price risk. It differs from other futures exchanges because of its unique prompt-date structure.
There is also a report that NYX is considering a bid for the LCH Clearnet clearing house. The LSE is also in talks on buying a controlling stake in LCH. LCH is the go-between buyers and sellers and ensures a deal goes ahead if one of the parties fails to pay.
The Economist magazine, commenting before the Euro ruling on the DB-NYX merger, gave some interesting insights into the dynamics of exchange mergers and liquidity: “But there are reasons to think that the deal could be beneficial to investors. Exchanges are platforms on which buyers and sellers can meet, so a lower number of exchanges, which increases the potential for buyer-seller matches, can be better than a fragmented system. In addition, making all trades on one exchange could lower investors’ costs. This is because some assets (gold and equities, say) tend to be negatively correlated, so risks offset each other somewhat. An investor wagering that both gold and equities will go up should need to provide less collateral if a single exchange is used. Economists advising the exchanges estimate investors could reduce collateral-posting by €3 bn ($3.9 bn), a likely annual cost saving of roughly €300m.
“Nor would a merger necessarily mean increases in trading charges. The biggest investors are vital to the exchanges (the five largest NYSE clients make over 20% of total trades). These investors could move to non-European venues if charges rise, or they could set up their own platforms to deal with each other. And since costs of entry are not prohibitive, plenty of other established exchanges could be tempted into Europe if venues there started to look very profitable. The threats of switching or entry should keep prices to large investors competitive. And since regulators would take a dim view of any price discrimination, small investors should be protected from high charges, too.”
Eroding Spain’s national exchange
Several rival trading ventures, the latest being NYX, are offering price promotion on Spanish stocks. Bolsas y Mercados Espanoles (BME), Spain’s incumbent exchange, is the last of Europe’s large bourses to retain a near-monopoly in the trading of its national stocks, and the others are gaining momentum in efforts to break the stranglehold. Bats Chi-X Europe, the region’s largest alternative platform, has had an extended price promotion in the most-liquid Spanish stocks.
The success of the NYSE Arca Europe platform and others in Spain have been hindered by the failure of Spanish regulators and the BME to fully embrace the EU’s markets in financial instruments directive (Mifid – 2007), which allowed share trading to take place away from national stock exchanges. Mifid has boosted the rise of several alternative platforms and a dramatic fall in the share of trading conducted by markets including the LSE, NYX and DB.