THE GLOVES ARE OFF.

The trading landscape may be changing but Xavier Rolet explains why the LSE will be one of the main contenders.

In the run up to MiFID, many predicted that exchanges would lose
significant market share to MTFs and that you would find it difficult to compete with them on price and technology. Your acquisition of Turquoise appears to confirm the latter. What does that acquisition mean for the LSE? How will you leverage it? What can the LSE bring to that acquisition or is it more about what Turquoise can offer the LSE?   

The key aspects of our shareholding in Turquoise are that it enables the Group to partner with its major clients, and to gain a foothold in both lit and dark pan-European equity trading. Turquoise is still an independent competing pan-European MTF, trading both Italian and UK cash equities.  From Turquoise’s standpoint, what the acquisition will do is allow it to benefit from the Group’s infrastructure and from the migration to the new MillenniumIT platform later in the year. This will put it in a position to significantly grow its market share in the coming months.

How well have traditional exchanges emerged from MiFID and is it fair to say that the exchanges’ stranglehold on trading has diminished? 

Competition is here to stay, and we welcome it. MiFID has helped bring down the cost of trading and stimulate innovation. Exchanges have lost market share of course, but we intend to compete. We’re improving our technology – we acquired MillenniumIT. We’re lowering our costs and we are passing on the savings to our clients in terms of lower tariffs. And we’re scaling up our assets – we’re using Turquoise to reach into Europe, and offer dark trading.

What are your views on liquidity fragmentation. Is it a good thing for the market or is it creating more cost and complexity?

Fragmentation of trading activity is an inevitable consequence of competition. MiFID has created a competitive landscape, encouraging tighter spreads and lower prices, to the benefit of investors. This in turn has led to innovation in areas like dark pools and high frequency trading. Despite the fragmentation, the London Stock Exchange remains the central price formation venue to which prices on other platforms are pegged.

What do you think needs to be done to harmonise the post trade world?

Post trade costs are currently too high. This is because the structure of the post trade world is inefficient: Clearing houses’ capital bases and risk models differ from country to country, and there’s no consistency in the way they’re regulated, allowing high cost national models to perpetuate. If we’re going to have a secure post trade infrastructure in Europe that is efficient and competitive, this needs to change and we need common standards of regulation with passports enabling CCPs to operate and interoperate across Europe. Regulation of clearing houses that is consistent across Europe will create the dual effects of security and proper competition. Central bank regulation of clearing houses is something the US Federal Government is looking at now, and I think Brussels should be considering it too, due to the systemic importance of CCPs.

What future role do you foresee exchanges playing in the trading
landscape? Will it revert back to the US model of early 2000 where all the independent ECNs were snapped up by the major exchanges?

The competitive landscape for equities trading is not likely to change in foreseeable future although it will evolve. Most of the current crop of MTFs are loss-making although I doubt the number will be as high in a few years as it is now. I don’t foresee a repetition of what happened in the US ten years ago. The market structure in Europe is different. Where Europe does need to replicate the US is in achieving the levels of equity turnover it sees. Europe has a higher GDP and a larger population than the US, but the value of equity traded in Europe is not even a third of that in the US. The main way to change this is by bringing down the cost of trading in Europe. This means ensuring competition can flourish both in the secondary markets and in the post trade world, and exchanges’ roles in ensuring this are central.

Will stock exchanges have to become like department stores catering to every link of the value chain in order to compete with the new players?

Diversification is enormously important in the exchange industry. Our revenue streams for example are very diverse. Around 20% of our revenues come from our post trade assets, while nearly 35% come from information and technology services. Under half comes from our Capital Markets division.

Providing our customers with a range of services is one thing, but exchanges also have an important role to play in primary markets, centralising price formation and providing infrastructure. This extends to working with governments and regulators to ensure a successful future for financial markets, and the economy as a whole. Exchanges are not always directly comparable with the new entrants.

I read recently that you expect the LSE to become one of a select group of leading global exchanges as the industry consolidates over the medium term.  What are the main planks of your strategy to remain in the club?

Regulation, technology, competition; all these things are shaping the industry at an unprecedented pace and those that can’t keep up won’t survive. For this reason, I wouldn’t be surprised to see five or six major global exchange groups in about ten years time. We intend to be one of them. Pan-European scope, reliable and efficient technology, competitive pricing; it’s key we stay on top of these things and, most importantly, we need to listen to, work with, and align our own interests with those of our major clients.

Euroclear UK & Ireland has reduced its trade-netting tariff
from the start March. How much will it cut the cost of trading on the LSE and what will be the overall impact? 

We estimate our customers will save around £10 m in the next year due to EUI’s decision. It’s a step in the right direction, and it levels the playing field with our competitors, but we remain committed to working with all parties to keep bringing down the cost of post trade services and despite the short term tariff reduction we continue to believe that in the medium term the netting model will have to change. It’s vital not just for the UK, but for Europe as a whole, that post trade costs are significantly reduced. The implementation of pan-European interoperability will be instrumental in this – we can’t hope to match US levels of liquidity in Europe if we don’t have genuine competition in post trade.

Do you think the 50% bonus tax in the UK will impact London’s standing as a major financial centre? 

London’s standing as a major financial centre goes much deeper than its tax regime. It has one of the largest pools of investors in the world. It has a long history of market making and on top of this it has an unparalleled pool of expertise, in economics, in law, and in specialist sectors such as Islamic finance. London has established itself in these areas over decades, even centuries. The infrastructure that makes it such a successful financial centre is very strong, and uniquely diverse. We mustn’t underestimate this value, and its crucial we protect London’s reputation going forward.