Exchange CEO Roundup
Exchanges kicked off 2012 amid difficult macroeconomic conditions that have spiked market volatility and suppressed trading volume. At the same time, there are positive signs for the sector – exchanges have regained some momentum in their competitive battle against alternative trading systems, and developing regulation stands to boost business by moving over-the-counter derivatives trading onto exchanges.
Markets Media interviewed chief executives of some of the world’s largest exchanges regarding the state of the business and what’s in store this year.
London Stock Exchange
LSE Group, the owner of the London Stock Exchange, withdrew its proposal to buy Canada’s TMX Group in June due to a lack of support from TMX shareholders. LSE has successfully moved on by tending to its own business, according to CEO Xavier Rolet.
“We are continuing to focus on our strategy of getting in shape through operational efficiency and strong cost controls, leveraging our assets through development of our existing business, and seeking opportunities to further grow our business,” Rolet told Markets Media in an e-mailed response to questions. “We continue to see the results of the execution of our diversification strategy with the successful leveraging of our assets including Borsa Italiana, which now accounts for 50% of Group revenues. We also continue to maintain close partnerships with our customers to drive innovation and efficiencies, for example through our ‘with customer’ businesses such as Turquoise and MTS.”
Rolet said LSE had a “very good” 2011, which included pre-tax profit higher by 79% at one point in the year. Underscoring the exchange company’s diversification strategy, business expanded at each of LSE’s primary businesses – capital markets, post-trade, technology, and information services.
LSE’s specific 2011 accomplishments included hosting the £6bn Glencore initial public offering in May, the largest-ever international IPO; launching the Turquoise Derivatives platform; the LSE technology platform Millennium IT chosen to provide services to Mongolia, Tullett Prebon and elsewhere; and the Order Book for Retail Bonds attracting new issuers and raising £282.5m for National Grid in October. Rolet said LSE’s post-trade business continues to expand and the company remains in exclusive talks with LCH.Clearnet regarding a potential business combination.
Rolet said LSE managed well through the extraordinary market volatility of 2011 because its businesses don’t perform closely in line with one another.
“Our range of products and services across our four main business segments are affected by varying macroeconomic factors and this diversified, well-hedged, and often inversely correlated portfolio, presents opportunities in both stable and volatile markets,” Rolet said. “For example, when markets are stable, primary and secondary equity markets tend to perform well and during times of market turbulence, our derivatives and clearing businesses tend to perform well. In the last year, over half the Group’s income was derived from our post-trade services and information services divisions, a reflection of our wider move to diversify our business.”
LSE hosted about 15% more IPOs in 2011 compared with a year earlier, and “the pipeline also remains encouraging with a number of international companies seeking to tap into the liquidity and broad profile that a listing in London in particular can offer,” Rolet said.
The end result of financial regulation will be a critical determinant for the future of the exchange sector, Rolet indicated. “Successful financial markets need strong and effective governance, and we believe that strong regulation is vital to ensuring an effective market. Regulation should be based on solid evidenced policy, and promote transparency and competition,” he said.
“The European and global regulatory landscape is currently undergoing major structural change. This will have a significant impact on the international exchange industry,” Rolet said. “The MiFID II/MiFIR proposals for example, will see moves towards non-discriminatory access to CCPs plus the introduction of non-exclusive licensing of trade indices which should help open up competition in listed derivatives and provide further opportunities for Turquoise Derivatives.”
In 2012, LSE will focus on its strategy of “getting in shape, leveraging our assets and seeking opportunities,” Rolet said, citing a specific initiative of launching single-stock options in April 2012. “The Group also aims to maintain our strong customer focus and partner with clients to drive innovation and improve our operational efficiency through improvements in technology, aligning with clients and controlling costs.”
Tokyo Stock Exchange
The Tokyo Stock Exchange Group operated through the aftermath of the earthquake and tsunami that hit Japan’s eastern coast in March 2011, helping the recovery of listed companies in Tohoku, according to CEO Atsushi Saito. Another 2011 accomplishment was an expansion of trading hours.
In 2012, TSE aims to boost initial public offerings and expand markets for derivatives and exchange-traded funds. TSE is also pursuing a business combination with Osaka Securities Exchange.
“We think our merger with OSE will make (for a) steady profit structure, and be able to provide a highly attractive and convenient securities market as the strongest securities exchange in Asia through the system combination between cash and derivatives markets,” Saito told Markets Media in an e-mailed response to questions.
TSE was able to provide a “stable trading venue” through volatile and turbulent global markets last year, Saito said, and the exchange was helped by strong performance from its Arrowhead system for cash trading and New Tdex+ system for derivatives trading. “TSE also had a good market condition for IPOs through our promotion activities,” Saito said.
Limiting risk from the ongoing debt crisis in Greece and elsewhere in Europe is the biggest current challenge for the global financial sector, which includes exchanges, Saito opined.
Singapore Exchange was rebuffed in its bid to buy Australia Securities Exchange in April 2011, but SGX Chief Executive Magnus Bocker said the Asian bourse is doing just fine on its own.
“While we still believe that a combination with ASX would have benefited the Australian investor and market, we are currently focused on organic growth,” Bocker told Markets Media.
In 2012, Singapore Exchange plans to achieve organic growth through new products and services, in conjunction with improved connectivity and technology.
Bocker said SGX’s accomplishments in 2011 were manifold, and included the facilitation of an efficient marketplace; record capital raising of $8.3 billion in equity and $115 billion in debt through early December; increased interest from international market participants; and the creation of the world’s fastest trading engine.
“We now have 41% of our listed companies come from beyond the shores of Singapore, which makes us the most international stock exchange,” Bocker said. “In August 2011, SGX began operating the world’s fastest trading engine, Reach, which has an order response time of less than 90 microseconds and significantly higher capacity.”
Other 2011 SGX accomplishments cited by Bocker included improvements to market micro-structure; record trading volume in derivatives; new fixed-income and commodity products; and enhanced distribution. SGX’s financial performance for the year ended June 30, 2011 was “creditable,” Bocker said, given that “the global financial markets had a troubled year punctuated with uncertainty.”
New products under development include MSCI Indonesia index futures. SGX also plans to improve market reliability. “We expect to introduce market safeguards including circuit breakers and pre-trade risk controls to ensure trading remains fair, orderly and transparent when high-frequency traders enter the market,” Bocker said.
Given the economic struggles in the U.S. and Europe, Singapore Exchange is well-positioned as the ‘Gateway to Asia,’ according to Bocker.
“Asia will continue to lead the world in terms of economic growth and dynamism,” Bocker said. “We are not China, we are not India, nor Indonesia, but we provide easy access to all of these economies. Our combination of a deep liquidity pool as a global wealth management center, our position as a major financial and commodity trading hub, our AAA rating and world-class regulatory framework, assures companies that large IPOs can be easily absorbed and that our governance standards are robust.”
Despite the ASX deal failure, Singapore Exchange remains open to considering partnerships, collaborations and other transactions with other exchanges, Bocker indicated.
Johannesburg Stock Exchange
Global market turbulence in 2011 was a mixed bag for exchanges: it was not helpful for investor confidence, but it did result in some banner trading days for exchanges worldwide.
The Johannesburg Stock Exchange handled 230,797 trades on August 10, 2011, topping the South African trading venue’s previous daily record of 205,784 set 14 months earlier.
“The JSE’s focus on serving the needs of issuers and investors doesn’t change, peaceful business environment or turbulent,” said Nicky Newton-King, the newly appointed head of the Johannesburg Stock Exchange.
Newton-King cited a litany of 2011 accomplishments for the exchange, including progress on technological initiatives to enhance trading and back-office operations and joining an alliance to cross-list benchmark equity index derivatives on exchanges in Brazil, Russia, Hong Kong, and India. JSE also launched a power derivatives product, acquired a managed-account platform to provide more transparency for hedge-fund trading, and issued new minimum-size requirements for off-screen derivative trades.
Additionally, JSE was recognized by the World Economic Forum (WEF) Global Competitiveness report for its regulatory strength and credibility. “In a globally competitive environment, markets with strong regulation, solid infrastructure and thriving institutions will be better positioned to attract sustainable capital flows,” Newton-King said.
The precarious global economy over the past few years has slowed exchange listings worldwide, and South Africa has not averted the downdraft, Newton-King noted. “Still, the JSE has seen a number of good quality listings in 2011 and we have a listings pipeline,” she said.
A key challenge for exchanges in 2012 is attracting financial instruments from the over-the-counter market, Newton-King said. JSE will focus on this task in 2012, while also working on improving its technological offerings, increasing foreign-investor participation, and implementing a new engine for matching equity trades.
“Delivering in this manner will enable the JSE to position itself well to capitalize in the future on the winds that are clearly blowing through our industry both locally and globally,” Newton-King said. “We continue to grow our product range and trade volumes while keeping a very tight handle on our costs and our fees to clients, despite a fairly fixed-cost infrastructure and significant investment in technology. This has enabled us to remain competitive to our global counterparts.”
Newton-King said JSE executives are mindful of the trend of exchange consolidation and the need to be linked to global markets. Aside from a full-blown merger with another exchange, she said the global connectivity can be achieved through product diversification, the provision of value-added services, and joint ventures such as the recently announced BRICS initiative and other agreements in place with CME Group and the London Stock Exchange.
The business of providing a venue to host trades may be centuries old, but it can be argued that exchanges function very similarly to Facebook and Twitter.
“I look at exchanges as the original social media network,” said Bill O’Brien, chief executive of U.S. equity exchange Direct Edge. “They are made up of a diverse set of participants who come together to form an ecosystem that helps them achieve something that could not have been achieved individually.”
Direct Edge had a good 2011 in a difficult market, O’Brien told Markets Media in a telephone interview.
“We’ve built out our connectivity services to become a material part of our business, led by our Connect Edge product. We’ve formed important strategic partnerships to expand our data offerings leveraging Xignite and Data Explorers. We have made incredible progress improving our IT, compliance and infrastructure consistent with our aspirations to be regarded as a model exchange,” O’Brien said. “We made some significant new additions to our management team. And we announced our intention to launch a stock exchange in Rio de Janeiro.”
“It has been a roller coaster of a year for the markets and I am happy to say that our exchange performed well under the duress of severe volume swings and volatility,” O’Brien continued. “From an IT perspective in particular, Direct Edge managed quite successfully thanks to Saro Jahani, our new chief information officer, who has led a swarm of new improvements that have increased throughput and lowered latency.”
The exchange sector’s biggest challenge in 2012 is global macroeconomic uncertainty, which O’Brien said weakens the investor confidence exchanges rely upon to drive volumes. “For exchanges in particular, it means less volume and reduced capital formation with fewer companies going public or staying private longer,” he said.
In 2012, Direct Edge plans to expand its core business via product and pricing efficiency that makes trading more efficient, and also build out adjacent businesses by expanding the product suite of connectivity and data services. The Jersey City, New Jersey-based exchange company is targeting the fourth quarter of 2012 for the launch of Direct Edge Brazil.
“We are focused on growing market share by creating the best ecosystem,” O’Brien said. “Domestically, we will continue to innovate in our core offerings and build up our connectivity, technology, and market data offerings. Internationally, we hope to adapt our services to the unique needs of Brazil.”
Chicago Board Options Exchange
Chicago Board Options Exchange plans to keep stirring its hot-selling alphabet soup in 2012.
“CBOE’s research and business development teams are continually exploring news ways to leverage current initiatives – our exclusive VIX franchise, C2 and SPXpm,” said Chief Executive William Brodsky. “In 2012, we plan to expand our VIX offerings and delve into new areas as well, including real estate indexes. We’ll also build on our education and marketing initiatives to drive investor awareness of the benefits of VIX, SPXpm and options in general.”
In October 2011, Chicago-based CBOE launched trading in SPXpm, an electronic S&P 500 options product, on its C2 Options Exchange. Designed to provide users with greater control at a lower cost than other electronically traded S&P 500 options products, Brodsky said SPXpm employs cash settlement, which eliminates the need for physical delivery, and European exercise, which removes the risk of early option assignment.
“Combined, we believe these features make SPXpm the best in class among electronically traded S&P 500 contracts,” Brodsky said. The number of C2 market makers doubled in the two months after the launch of SPXpm, according to Brodsky; volume averaged 5,300 contracts a day in November, and open interest stood at nearly 100,000 contracts at November’s expiration, almost double month-earlier levels.
CBOE’s all-electronic C2 exchange saw volume increase 34% in the third quarter compared with the second quarter. In November, the exchange implemented a new maker-taker fee schedule that offers the options industry’s highest maker credit for posting liquidity and a new, pro-rata algorithm.
Aside from those new initiatives, CBOE reported a strong year for its signature CBOE Volatility Index (VIX) product, which Brodsky said traded robustly through market volatility and calm. Through November, VIX options volume increased by 65%, and VIX futures volume almost tripled from a year earlier. “But we think the best is yet to come,” Brodsky told Markets Media.
Challenges facing the global exchange sector include macroeconomic weakness and regulatory uncertainty, including a lack of coordination across borders. “If the final Dodd-Frank rules are watered down by politics, we could repeat history and suffer another financial meltdown. Should that happen, the challenge of regaining investor confidence would again affect exchanges globally,” Brodsky said.
“A lack of international regulatory coordination could pose challenges for exchanges,” the CEO continued. “With regulatory reform in the U.S. and other countries moving on different time schedules, regulatory arbitrage could occur. Trading ultimately could flow to countries with less expensive and less restrictive oversight.”
Brodsky said the global options market has considerable growth prospects overall, and CBOE is committed to increasing its U.S. market share from current levels of 26% to 28%.
International Securities Exchange
For U.S.-based options venue International Securities Exchange, 2011 was the year a long-anticipated technological upgrade came to fruition.
“Our primary focus in 2011 was the implementation of ISE’s new options trading system based on the Optimise trading architecture,” said Gary Katz, ISE’s chief executive. “Launching the system was the culmination of a three-year, transatlantic project, and the performance results we have had thus far have been extremely gratifying…Optimise has already surpassed the targets we set for stability, low latency and rich functionality, and we have only broken the surface of what the system can do.”
The April 2011 launch of Optimise has set the stage for some of ISE’s major 2012 initiatives. “These involve new, innovative functionalities made possible by the flexibility of the Optimise trading platform as well as latency reductions and increasing liquidity that will attract order flow,” said Katz.
ISE plans to expand its index and ETF business this year. “We are confident that 2012 will see innovative new product launches with our partner fund sponsors and continued growth in assets under management for our existing product portfolio,” Katz said.
ISE’s systems performed well through the market turbulence in the second half of 2011, according to Katz. However, the CEO noted that such volatility can scare away investors and reduce exchanges’ trade volumes.
Going forward, there is no shortage of challenges for exchanges and other market participants. “We are in a period of great uncertainty, which has manifested itself in market volatility,” Katz said. “The uncertainty stems from a number of different variables, including regulatory uncertainty, political gridlock, and concern about the global economic outlook. Investors are also still concerned about market structure issues following the May 2010 ‘flash crash’ and have unanswered questions about regulatory reform and the impact of Dodd-Frank.”
Added Katz, “all of these factors will impact the global exchange sector in 2012, and we must be more innovative than ever to continue to maintain trading volume and attract new participants to the market.”