Category: Analyses

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Stock Exchange Market Share Is Not the Whole Issue

Summary

The LSE, like many other European exchanges, finds itself under severe pressure to maintain its market share. However, investors concentrating purely on market share are not viewing the whole picture…

Analysis

The media has proclaimed various degrees of shock each time competing (MTF) platforms have taken market share from the exchanges. Yet, the reality is the exchanges were in many cases simply ignoring the evidence of what had happened in the USA under similar regulatory regimes.

Now it looks as if the psychologically important 50% barrier for London market share could be breached. Not unsurprisingly some people are concerned about the positioning of Europe’s traditional equity market leader.

It was always likely that at lest a third of London’s volume could go to competitors. However,  the current state of market share is  interesting as many trades have ‘come in’ from the OTC marketplace to be reported. Meanwhile, the competing platforms can arguably be said to be growing the business per se. True, equity turnover may be a tad sluggish compared to previous highs in many parts but the sum total of equity volume given the relatively depressed nature of UK share values, does suggest the market is doing a lot better thanks to competition compared to previous downturns.

However, the really difficult issue for LSE going forward is in its data sales. This provides significant group revenues. However, how many investors want  to pay ‘full price’ if they are receiving only a portion of the ‘full tape’ that they previously anticipated? If the LSE continues to haemorrhage market share, there will come a point (60%, 55%, 50%?) where investors will become reluctant to pay the ‘full price’ for a lesser product. Some traders might just accept the free data offerings from LSE competitors instead.

That is likely to have a significant impact on LSE valuation.

 

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Swiss Chairmen In Vogue

Summary

LCH.Clearnet have made a fascinating choice for their new Chairman at a time when the cinderella clearing business faces both the greatest opportunities, as well as a great many risks in several generations…

Analysis

Of course it is difficult to ignore the symmetry in two Swiss men being chosen to chair European clearing houses within weeks of each other. After the start-up (seeking regulatory approval) CME Europe Clearing House announced Otto Naegeli as their new Chairman, the LCH.Clearnet have now unveiled Jacques Aigrain as their new Chairman.

The Naegeli appointment to CME CH can be seen as seeking a safe pair of hands with a reasonable profile in the European banking and financial realm. Meanwhile Aigrain provides a really serious financial executive who many would argue is still in his prime as the non-executive Chairman of the intriguingly positioned LCH.Clearnet group.

Aigrain’s background at both JP Morgan and SwissRe (where he was CEO 2006-2009) will give him a very different orientation towards the marketplace from his predecessor, Chris Tupker.

LCH.Clearnet recently reported the first loss in its history amid a fascinating shuffle of shareholders which has seen the banks really take control of the institution. Now LCH.Clearnet needs to really provide a way for banks to CCP clear their OTC products while protecting their business from exchanges. LCH.Clearnet is set for interesting times and Aigrain is a most capable Chairman to lead them into new pastures. His high profile as a leading corporate executive will help LCH.Clearnet with many international regulatory tussles while it will be intriguing to see how his vision meshes with CEO Roger Liddell.

 

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Chi-X Chief In Shock Departure

Summary

Successful MTF Chi-X has been largely shaped by its CEO Peter Randall. His departure is a remarkable move given his success in making CHi-X a leading ATS not only in Europe but various other jurisdictions too.

Analysis

Peter Randall had enjoyed a long and successful career in the City of London but when he went to Chi-X his reputation became a stellar one, creating Europe’s first quasi-ubiquitous MTF. Randall melded a team that has led the European MTF landscape, snapping at the heels of the legacy exchanges and demonstrating all the benefits of MiFiD for end users of exchanges.

An inveterate critic of the legacy players, particularly the London Stock Exchange (LSE), Randall had until recently even been tipped as a possible replacement for CEO Dame Clara Furse. However, the poacher turned gamekeeper ploy was halted when Xavier Rolet emerged from a fairly packed field.

Nevertheless, Randall’s operational success with Chi-X ought to make him a prime candidate for either a legacy stock exchange looking for a new direction or indeed one of the many other MTFs which are seeking to replicate CHi-X’s success to date. Wherever Randall emerges it will make waves…stay tuned to this story!

 

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BATS Beats Turquoise, Europe’s MTFs Look More Volatile Than Ever Under Mifid

Summary

The fact that Turquoise has lost its shareholder market makers has caused its volume to slump, allowing upstart (and US 500lb gorilla) BATS Europe to leap ahead in market share. Takeovers by legacy exchanges now look more likely than ever.

Analysis

BATS Europe, the 500lb gorilla of the US MTF space may still be lagging Europe’s 500lb gorilla Chi-X by a significant margin but now it has surpassed Turquoise, the investment banks’ own platform, despite being much later to market.

Turquoise has lost its market makers due to the expiration of its 6 month agreement from its investment banking shareholders to provide liquidity.

This may yet prove a very significant turning point in the Turquoise story. Backed by investment banks at its outset, Turquoise was born in an atmosphere of greater hubris than is evident amongst the investment banking community today. It has been very clear to educated onlookers for a considerable period that the Turquoise story (as with many other MTFs) may end with a trade sale to a legacy exchange just as happened with the first wave of MTFs, the ECNs, in the post dotcom bubble environment.

Turquoise is susceptible to a bid simply because investment banks will take cash for any asset they can dispose of right now. That will encourage the ambitions of legacy exchanges Deutsche Borse and Euronext who have recently expressed an interest in buying a European MTF.

Otherwise, Turquoise right now looks in danger of already being a busted flush. Its shareholders have more pressing issues to deal with than providing liquidity on the fringes of Europe’s equity markets. The Turquoise MTF platform itself has simply not lived up to the frankly excessive hype that accompanied its launch. Then again, investment banks hyping their platforms only for events to make them perform below their perceived par is a recurring story in financial markets. The original Brokertec is just once such example…

 

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NASCAR Retains A Super Brand But In An Expensive Domain

Summary

NASCAR has become the most successful motorsport brand in the USA. However, other series are suffering massive financial issues as sponsors drop out in the current economic climate and experts point to a drop in US motorsport sponsorship in 2009.

Analysis

A key advantage to NASCAR and its success has always been accessibility. Formula One by comparison is rather elitist and while popular with many nations has not really been popular in the USA where NASCAR thrives.

Nevertheless, the significant financial woes of corporate America is likely to be an issue soon for NACAR too. In F1, a number of sponsors have gone or are going to disappear soon (banks in particular such as Royal Bank of Scotland (RBS) for instance which have been keen supporters of Grand Prix racing in recent years).

NASCAR has come from the relative wilderness of being seen as a rather “hick” backwater of the south to a mainstream US phenomenon (with limited success elsewhere) in little more than a decade or two. However, this is the first really challenging environment economically NASCAR has faced. Moreover, as a flag waving US championship, the financial problems of the big auto makers for instance General Motors is a serious issue.

Moreover, recent research from consultancy IEG anticipates a 6% fall in motorsport sponsorship in the USA this year (from $3.5billion to $3.3 billion). If so, this would the first such fall in sponsorship since IEG began tracking motorsports sponsorship in 1985.

Nevertheless, NASCAR may be more flexible than other series such as Formula One. In F1 sponsors usually stay the same (and liveries are essentially fixed by regulations) for an entire season. NASCAR, on the other hand has been much more used to race by race deals throughout its commercial development.

That said, the costs of NASCAR have risen dramatically and while their drivers are now earning similar remuneration to their Formula One cousins, the “fixed cost” portion of their retainers is much lower as they earn directly from prize money and also considerably from merchandizing revenues. This year household names such as Tony Stewart may have to be even more open to the public to try to retain their overall incomes…

 

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Adair: FSA Will Be Tougher But Not As Tough As Some?

Summary

The Turner Report hints that the UK FSA may get tough but not really that tough, or at least, they are going to leave the being really tough bit to other jurisdictions…

Analysis

The Turner report makes for interesting reading and it certainly marks some sort of watershed in the UK regulatory system. However, the issue that London as a financial centre will remain strong simply because it is not going to be quite sotough as other juirisdictions with its new regulation is an intriguing dichotomy and opens up the first fissure in the reactionary global regulatory concensus that has been allegedly building in recent weeks.

Meanwhile, the situation is further “cloudified” (as opposed to being clarified) by the UK Finance Minister who apparently never believed in “light touch” regulation anyway. However, Alastair Darling continues to agree with the concept of “Principals-based” regulation which would suggest that he is more in the business of talking tough while resisting the instincts of the British Labour Party to make a switch to a much more left of centre, highly regulated approach.

It is intriguing that such clearly equivocal statements are being made so as to attempt to protect London’s status as the world’s most cosmopolitan financial centre. However. at the same time, these recent UK statements leave open the issue of just how co-ordinated the rush to much greater global regulation actually is?

It would seem wise to suggest that once the current political thrashing of offshore financial services centres has finally abated then it will be the onshore financial centres who begin a more nuanced approach to offering finely granulated regulatory arbitrage…

 

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Serbian Wisdom May Not Make Much Impact On The West

Summary

Serbia’s Central Bank Chief correctly ruminates on EU reliance while observing the need for internal economic reform that often citizens are more comfortable with than the political classes.

Analysis

Given that Serbia has one of the world’s older central banks, it would be wise to take heed of Radovan Jelasic’s deeply considered arguments. In a region where politicans are often seen as somewhat hot-headed, Radovan remains a calming influence on the tiller of Serbian finance – after a series of hectic and often horrific problems in the past decade or two.

Truly Eastern European economies do need to look within to provide a degree of reform to their economies and make them much more functional and lower friction for entrepreneurs and business developers. At the same time, this may be complicated by the fact that much of the western world seems to be lurching back to towards the left. In that respect, the CEE economies simply cannot afford to follow suit.

The political dilemma is that in CEE many of the politicans are precisely that: political. They lack even the most rudimentary understanding of economics and as such are not ideally positioned to create dynamic economies. Moreover the economies themselves need to advance to become deeper and stronger across more sectors. In the past decade property has been centre stage and while this has helped development, the resultant asset boom was not neccessarily conducive to broad economic growth.

The EU may currently be unclear as to its policy on the Balkans and this is truly a tragedy. For the Balkans need to see a stable olive branch from Europe to overcome the resentment that has grown in the likes of Serbia in recent times from what are still regarded by the citizenry as atrocities carried out by NATO in the past decade.

Serbia needs help as do many other nations in CEE and SEE. The fact that the EU has recently seemed keener on political machinations through carving out a (probably untenable) statelet in Kosovo has not helped the east believe that the EU remotely understands its politics, nor that it prioritises economic development.

The banking system is starved of capital in the likes of Serbia and many other CEE nations currently and that is ultimately proving a disaster for the economy. There needs to be a clear method of deploying credit and the banking system needs to be capable of lending for more than just “bricks and mortar.”

In relation to political instability, of course this may be a factor in the Balkans after their recent history in particular. However, the future ought to be bright provided the EU and international bodies can help engage the governments of the Balkans in ways to ensure that their eonomies remain stable. The danger is that if the EU ignores the Balkans then it is simply creating a tinderbox of resentment on its eastern fringes.

Providing the west can continue to engage with the Balkans and indeed the CEE as a whole then the converse is true: some of the greatest global opportunities in the aftermath of this financial crisis will be found in both the CEE and in particular not just the Balkans but indeed Serbia.

 

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ICE Makes A Sound CDS Clearing Start

Summary

The ICE CDS facility is open for business and even has business to transact! – That’s an interesting development in the CDS market and one which will leave competitors such as CME, EUREX and LIFFE somewhat green with envy.

Analysis

Given that previous attempts to provide a more commoditised service clearing (and even trading) Credit Default Swaps (CDS) has been a resounding failure, the opportunistic Jeff Sprecher seems to have hit a rich seam even during the first week of operations.

True, the majority of cleared trades happen to have been novated into the CCP without neccessarily being recent trades but the fact that an “Open Interest” remains at all is the key issue. The marketplace seems to want to use the more “exclusive” ICE proposition currently and may make it difficult for the more conventional futures exchanges to gain much traction. CME is entering the frey imminently as a result of its authorisation being received last week while LIFFE’s facility remains a somewhat uncherished orphan. EUREX plans to re-launch soon, although its original facility was also unsuccessful in Europe.

 

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Polish Government Hit The Right Note With IMF

Summary

Polish Finance Minister Jacek Rostowski pulls another excellent stroke in his efforts to demonstrate that Poland may be surviving in the face of a pan-western ignorance about the granular differences of CEE and SEE economies.

Analysis

Polish Finance Minister Jacek Rostowki has been working hard to establish Poland’s economic credibility while the Zloty has been hammered by an unthinking panic retreat by western investors from the CEE. He helped coordinate a letter of late which helped at least abate the selling pressure on CEE currencies for a while by demonstrating a sense of unity amongst the stronger CEE economies.

The flaw in that argument of course was that Hungary eventually joined the group of signatories and that rather undermined the ethos of demonstrating that some EU economies were stronger than the prevailing western perception that everything east of Germany is a “basket case.”

By noting that Poland wants to play its part in the EU and world economy by helping the neighbors, the Tusk government has brilliantly managed to both showcase the relative soundness of its own economy as well as making it look like a leader of Central Europe during a time of crisis. That will help Poland’s standing in the EU amongst its CEE neighbors as it has neatly stepped into a political vacuum as many Western leaders have antagonized or ignored Eastern Europe in recent months.

Whether this will be enough to sustain the recent Zloty rally remains to be seen. The economy continues to function but growth is currently undermined by a credit system which is simply frozen solid due to the predominant western banks all having bigger problems to address before they can consider lending too much again in Poland.

The Polish economy is not out of the woods but even now, the worst predictions suggest an absence of growth as opposed to the massive collapses of economic output now being faced up by neighbors such as the Baltic states, Hungary, Ukraine and indeed, Germany and the rest of the west that is so worried about Eastern Europe.

Nevertheless, in terms of an elegant masterstroke to demonstrate the safety of the economy, noting that Poland wishes to be a net contributor to the IMF is very difficult to beat. Hopefully now the Tusk government will continue to reform and deregulate the sclerotic Polish bureaucracy and unleash the economy to grow rapidly once more…

 

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Moscow Exchange Makes An Eastern Advance

Summary

MICEX and RTS are clearly competing in Russia’s securities market but now MICEX are looking to tie up some overseas opportunities at some distance to their Moscow base.

Analysis

It’s not just in the developed world of North American and western European stock exchange where deals are being done.

Or, in fact, come to think of it, most of the west are still trying to digest the deals they did during the last bubble.

Meanwhile, out east, the Mongolian securities marketplace may not be the most talked about, even in the east but the Moscow Interbank Currency Exchange (MICEX) is keen to find a way to gain advantage over its Moscow rival Russian Trading System (RTS). In that respect, there can be little doubt that while battered by their recent first flush of a significant bear market in much of eastern Europe, the prospects for a very significant rebound in these relatively immature markets is likely to be considerable.

While privately held, there are some fascinating hidden seams of exchange investment being developed throughout Eastern Europe and into Asia.