ME exchanges battle for dominance

The long suffering Nasdaq which was unsuccessful in its bid to court the London Stock Exchange (LSE) and looked like suffering a similar setback in its pursuit of OMX Group in the Nordic countries, appears to have reached an interesting comprise.

Bourse Dubai, the other suitor for OMX, has agreed to let Nasdaq have OMX, while the Dubai exchange has agreed to take on Nasdaq's stake in the LSE, as well as a 20% stake in Nasdaq itself. It is all starting to sound rather incestuous in the world of exchanges - everybody is hopping into bed with one another in their bid to go global.

As part of the deal Bourse Dubai has agreed to give Nasdaq a share in the fledgling Dubai International Financial Exchange, which will now carry the Nasdaq name and use both Nasdaq and OMX market technology. Is it a 'win-win' for all parties? Well the LSE and Middle Eastern sceptics in Washington may not be cracking open the champagne bottles just yet.

As some pundits suggest, a government-owned UAE exchange owning a stake in a US brand name like Nasdaq may rise the ire of those that are not in favour of any Middle Eastern company owning anything American. One only has to recall Dubai Ports World's decision to sell off its US operations to an American owner following pressure from Congress. Is the US Congress likely to have similar feelings of discomfort about Bourse Dubai owning a stake in Nasdaq?

Similarly those that nurse nationalistic sentiments about the LSE may be equally miffed by the deal. This was borne out by the LSE's response to Qatar making an offer for Nasdaq's 31% stake in the LSE. According to a report in The Times, the LSE welcomed the Qatari investment as a "long-term" play. No such sentiments were ascribed to Dubai's stake in the LSE.

Now it appears the battle lines have been drawn between Dubai and Qatar with the latter making an overnight raid to acquire an almost 10% stake in OMX. Few could have predicted that the fate of the LSE and Nasdaq would lie in the hands of Middle Eastern exchanges.

The LSE expands into Europe

I have been particularly vocal about the London Stock Exchange's 'go-it-alone' strategy in light of trans-Atlantic consolidation between competing exchanges NYSE-Euronext and Nasdaq OMX, as well as the increasing threat of competition from emerging MTFs such as Project Turquoise.

Well the latest news is that the LSE instead of pursuing mergers with its larger rivals has decided to expand into Europe by buying Milan's Borsa Italiana for approximately £1.1bn. The question is, will it be enough to fend off competition from its larger consolidated European rivals and emerging competitors such as Project Turquoise which is in advanced negotiations with the Nordic Exchange's OMX Group to use it as its sole technology partner.

However, some bloggers, including myself, question whether the LSE's expansion strategy is a viable one going forward given that Borsa Italiana will not give the London exchange the global leverage cross-Atlantic mergers have given Euronext and now OMX.

For more opinions on the LSE's new-found expansion strategy, which some believe will not be enough to counter the threat from Project Turquoise, go to The CityUnslicker.

Eating humble pie

Although the ink is not quite dry on the recent announcement that Nasdaq and the OMX Nordic Exchange will join forces to create yet another trans-Atlantic exchange, the real news surely is what does this mean for the 'go-it-alone' London Stock Exchange (LSE)?

With the NYSE Euronext deal completed and the Nasdaq OMX combination giving both exchanges a strong technology and derivatives card to play, isn't it time that the LSE "swallowed its pride," stopped being a "prima donna" and secured a pan-European or cross-Atlantic merger of its own.

Operating profit (up 55% to £185.6 million for the year ended 31 March 2007) and primary market activity on the exchange may be healthy, but Frédéric Ponzo, managing director of consultancy, NET2S, believes the competitive landscape will change next year as NYSE Euronext and Nasdaq OMX look to increase their global market share and new market entrants such as Project Turquoise makes its presence felt.

Although Ponzo does not believe that the competition from ECNs and multilateral trading facilities will be as fierce as some anticipate, by 'going it alone' the LSE currently does not have the global reach of the trans-Atlantic exchanges, nor does it have their derivatives capabilities.

Could it be that the LSE may have to eat humble pie and seriously reconsider merging with the likes of Deutsche Börse in order to sustain its foothold not only in the UK but the European, if not global market? Or will national pride and cultural differences continue to stand in the way of a deal that could make sense in the longer term if not in the short term?

Fear and loathing on the acquisition trail

While the NYSE and Euronext put the final touches to their cross-Atlantic mega-merger, some may be thinking was the London Stock Exchange (LSE) right to slight the Nasdaq's advances.

Well apart from the obvious economies of scale and cost synergies that most mergers entail, it is easy to forget about the cultural and integration challenges that a merger on the scale of the NYSE's and Euronext's involves. Having cleared the regulatory hurdle, it is too soon to say whether they will clear the final hurdle, successfully integrating the two companies.

With that in mind then the LSE's 'go it alone' stance does not seem that brazen given that the London Stock Exchange is a revered institution and a merger with a US exchange would present significant cultural as well as technical challenges.

All is not necessarily lost though for those exchanges that say no to mergers. Acquisition is not the only option for the LSE or the Nasdaq looking to eke some value from its 29.16% minority investment in the LSE.

Bob McDowall, senior analyst, TowerGroup, believes that "interoperability" may be the "route to salvation for Nasdaq and the LSE."

In his latest research note, McDowall writes:

"Adopting a strategy of interoperability is a mutually co-operative, lower-risk approach to consolidation than acquisition, which carries reputational risk if it fails. However, for the LSE interoperability offers it the distinct business and technical benefits as a mechanism for the consolidation of exchanges without losing the independence a takeover removes."

According to McDowall, interoperability would allow the LSE to assess over time the extent to which it wants to work with other exchanges; it would also mean less
uncertainty for shareholders and stakeholders.

No rattling of sabres

Well there has been a lot of 'sabre rattling' going on around investment banks threatening to set up multilateral trading facilities to challenge the monopoly of Europe's exchanges.

However, one platform, Equiduct, which resurrected the old Easdaq pan-European exchange platform, appears to be doing a lot more than waving its sabre about provocatively. For those sceptics who thought it may not get off the ground (or was that Project Turquoise), Equiduct is demonstrating all the signs of a trading platform in the throes of going live.

Willy Van Stappen, ex LCH.Clearnet, has joined Equiduct as chief operating officer. He will be focused on the provision of 'best execution' services that Equiduct plans to offer including enabling firms to trade instruments listed across 29 markets via a single platform.

Equiduct has also secured its first round of funding from Belgium-based Bams Angels Fund and a group of London-based industry professionals (presumably that means investment banks or individuals that want to put the exchanges' noses out of joint). Market data service are scheduled for Q3 this year with trading on Equiduct expected to commence in Q1 2008.

Stock exchanges need to up their game

In this climate of fundamental change and regulatory uncertainty, one would think that IT investment would be at the top of exchange CIO's list of priorities. After all isn't that why the NYSE bought ArcaEx and Nasdaq bought INET, for their technology.

It also perhaps explains why the US exchanges are going after their European counterparts. Not only are they looking to expand their footprint beyond the US into Europe where trading volumes are anticipated to rise. But let's face it European exchanges, at least the major ones that their US counterparts are looking to buy, have much more sophisticated electronic trading systems.

Given the acquisitive mood that the US exchanges appear to be in, is it any surprise that IT spending amongst global exchanges is growing slowly? TowerGroup estimates that exchanges globally spent $2.72 billion on IT in 2006 and that spending will grow at a rate of 3% through 2009 – breaking down to 4% in 2007 and slowing to 2% to 3% from 2007 to 2009.

Not surprisingly exchange IT spending is growing the slowest in the US, where analysts such as Larry Tabb have said that retaining NY's glory as an international financial centre is not just about reducing regulatory oversight, but also enhancing technology and connectivity in the US market.

According to TowerGroup, IT spending amongst European exchanges is growing moderately, while the burgeoning and flourishing exchanges of Asia, trying to cope with stock market 'bubbles', are growing the fastest.

Dushyant Shahrawat, research area director, Securities & Capital Markets, TowerGroup says:

"Of all the public exchanges, those in the United States are currently under the greatest pressure to reduce costs as they go electronic, in order to get their IT expense / revenue ratio in line with that of other financial firms and European counterparts."

LSE does it again

Only just the other day I remarked that in the ongoing exchange consolidation wars, the London Stock Exchange and Deutsche Bourse stood out like pimples on a pumpkin in failing to elicit greater economies of scale.

Deutsche Bourse's failure is not for lack of trying; it has courted the LSE on more than one occasion and then Euronext, but it was rebuked. While Deutsche Bourse is the rebuked, the LSE on the other hand, seems to be comfortable playing the role of the 'rebuker', having just rejected Nasdaq's bid for the second time according to FT reports.

After the failure of its first bid, which valued the LSE at 950 pence a share, Nasdaq CEO Robert Greifeld pitted his luck on his second round offer of 1,243 pence a share, which he described as a "full and fair offer." Well, try and tell that to Clara Furse, CEO of the LSE, who appears to be hedging her bets. Either she is happy for the exchange to go it alone in the ongoing exchange consolidation battle or she is waiting for a better offer?

Octavio Marenzi, CEO, Celent, says that the LSE has staked out a fiercely independent path and its recent outstanding earnings mean that Furse feels under no pressure to be bought out by anyone. "Firms making bids for the London Stock Exchange continue to show rather odd behaviour," says Marenzi. "Most notably, there is the tendency to make offers below the current market value of the exchange. Nasdaq appears to be attempting this again, with predictable consequences -- either the bid must be raised or it will fail."

Will Nasdaq retreat from its current bid like Deutsche Bourse has from its attempts to court Euronext? It is anyone's guess. However, despite healthy earnings at the LSE, can it afford to go it alone for much longer in view of recent announcements by Equiduct that it will establish a pan-European exchange and that seven investment banks will build an MTF?

As firms gear up for MiFID, a somewhat different trading landscape awaits the national exchanges, which have enjoyed monopoly status. But as rival "high speed" execution venues emerge offering lower trading tariffs and cheaper post-trade reporting services than the LSE, can Furse and the LSE's shareholders sustain their go-it-alone stance?

Equiduct responds to MTF announcement

Below I have pasted Bob Fuller, CEO of Equiduct's response to the announcement by seven leading investment banks that they will launch an electronic trading platform to rival the leading European exchanges.

Unlike the consortium of investment banks, which will build a multilateral trading facility or MTF, Equiduct, which will also launch in 2007, aims to provide a pan-European platform for trading liquid shares post-MiFID. Although the announcement by the consortium of Tier 1 investment banks signals that they will build their own solution, Fuller anticipates that there will be enough appetite for its pan-European platform amongst Tier 2 and Tier 3 investment banks that do not want to shoulder the upfront investment costs associated with MiFID compliance.

"Today's announcement that a group of seven leading investment banks will confirm detailed plans to launch a trading rival to the London Stock Exchange is exciting news, and confirms the growing market requirement for alternative solutions to help meet the challenge of MiFID implementation within Europe," says Fuller.

"At Equiduct we believe that their announcement validates our analysis on the need for MiFID-compliant, Europe-wide trading. However it's interesting that they've decided to go down the MTF route, rather than opting as Equiduct has done to set up as a fully regulated pan-European electronic platform.

"This, coupled with our open access to clearing and settlement providers, gives us a distinctive proposition. We'll also be interested to see how the European marketplace relates to an offering owned by a small number of Tier-1 banks.

"With Equiduct we'll be primarily focusing on the significant number of Tier-2 and Tier-3 investment banks that can't afford to build their own solutions, however we also expect that we'll be continuing our discussions with Tier-1 investment banks including many of those currently involved in other projects as we're finding that our platform brings solutions regarding MiFID best execution that cannot easily be replicated.

Investment banks take on Europe's exchanges

The onset of MiFID in Europe's capital markets and the indecision of Europe's stock exchanges over whom they should merge with appears to be fuelling discontent amongst the world's largest investment banks.

Tired of waiting for consolidation talks between the big three exchanges, the LSE, Euronext and Deutsche Borse to bear fruit, leading investment banks such as Goldman Sachs, UBS, Merrill Lynch and Morgan Stanley have taken matters into their own hands, announcing the formation of a new "high speed" electronic trading system for European shares, which will launch in 2007. The platform will offer trading at tariffs lower than those provided by Europe's leading exchanges.

You don't need to be a rocket scientist to have seen this one coming, although that doesn't seem to have prevented the exchanges from dragging their feet. Many analysts predicted that MiFID, which removes the 'concentration rule' that forced trades in a number of countries to be conducted on national exchanges, would result in alternative trading venues being established by third parties, including investment banks.

Just recently, EASDAQ rose phoenix-like from the ashes with the announcement of a new pan-European exchange Equiduct, also launching next year, leveraging EASDAQ technology, which will provide a single point of connectivity for trading "liquid shares".

Surely the LSE, Deutsche Bourse and Europe's other myriad exchanges can no longer avoid the inevitable; consolidation and tariff reductions? The question is can Europe afford to support all the national exchanges plus new trading facilities that are likely to emerge post-MiFID? And what does this mean in terms of fragmenting liquidity? Presumably, trade flows will eventually gravitate towards those platforms that are not only cheaper, but faster, more cost effective and can provide best execution and a whole raft of services around pre- and post-trade transparency.

But for now poor old Deutsche Borse, which can't seem to find anyone that wants to merge with it, the LSE, and Euronext to a lesser extent as it looks like it will accept the NYSE's bid, are out in the cold in terms of finding suitable bedfellows to shack up with and to help deliver greater economies of scale.