Uncertainty In European Exchange Space

Terry Flanagan

Ambitious plans to create the world’s largest exchange by combining Deutsche Börse with NYSE Euronext, which was blocked by the European Commission earlier this month, has left the European exchange space in a bit of a quandary.

Richard Perrott, a London-based analyst who covers diversified financials for Berenberg, said: “It was a large merger for the sector and, given the extremely strong positions of Eurex and Liffe in derivatives, it was always going to see competition concerns. There was a fair chance from the start that the merger would not go through.”

In turning down the plans, the European Commission said that the combination of Deutsche Börse’s Eurex derivatives exchange and NYSE’s Liffe derivatives exchange would create a near-monopoly in exchange-traded derivatives in Europe. The decision is being interpreted as a stumbling block to future large cross-border exchange mergers.

Perrott believes that not a lot has actually changed since the European Commission ruling, but other M&A activity on the horizon in Europe includes LCH.Clearnet, where talks are progressing with the London Stock Exchange who could take a controlling stake in the Anglo-French clearing house, and the London Metal Exchange, which is up for sale and is continuing to narrow the list of suitors for its 135-year-old business to a single name.

Since the introduction in 2007 of the European Union’s Markets in Financial Instruments Directive, which broke what Perrott said was the “near quasi-monopoly held by the incumbent exchanges” with its focus on increased competition for investment services, multilateral trading facilities have begun to make their presence felt and traditional European bourses such as the LSE, Deutsche Börse and NYSE Euronext have felt the squeeze.

MTFs are narrower in scope than traditional exchanges and subject to less regulatory controls, offering only secondary trading in primarily very liquid, blue-chip stocks and are typically owned by their users, including investment banks, brokers and other trading firms. Since 2007, MTFs have succeeded in stealing equities trading away from traditional European exchanges with a tech-savvy and low-cost approach.

BATS Chi-X Europe, one such MTF, is now officially the largest European stock market by turnover, last year overtaking the LSE as the region’s biggest venue.

“Since 2007, incumbent exchanges have gone from enjoying quasi-monopolies in cash equities to suffering from intense competition,” Perrott added. “BATS Chi-X Europe, itself a merger between two market entrants, is now one of Europe’s leading equities trading platforms. Market share erosion of incumbent exchanges will continue as MTFs compete offering significantly lower trading tariffs.”

Perrott also believes that upcoming regulatory changes such as Mifid II, an update to the 2007 EU Directive that is currently working its way through Brussels, will have little impact on European stock exchanges.

He said: “From the perspective of the cash equity exchanges, Mifid II will be less transformational than Mifid. Many of the proposals are in response to consequences of MiFID, such as the fragmentation of trading across numerous venues and the resulting need for a consolidated post-trade tape.”

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