All Change at the Exchange: The European Exchange Landscape Post ICE/NYSE Euronext
With the floatation of Euronext now scheduled for mid-2014, the European Exchange landscape is set for further radical change. The full outcome of the growing plethora of regulation still has to play out, yet a chain of events is already in motion which will radically transform the incumbent exchanges. With declining equity turnover set to continue, unless radical changes are made to the business model, growth remains straddled to increasing market share or diversification out of equities.
The traditional exchange model is deemed sub optimal by many, with widespread customer dissatisfaction of the status quo and market participants clamouring for change. Differential treatment of stake holders, complex and ever increasing fee structures and order types, technology glitches – the increasing demands for greater transparency from regulators and fairness of business practices from participants means change is inevitable.
While many exchanges remain profitable, in order to maintain this profitability some are focusing primarily on reducing operating expenses through efficiency programmes rather than innovation. Many have far to go before they reach operating efficiencies sufficient to challenge BATS/Chi-X Europe operating expenses, the lowest of the group (see exhibit). With execution and clearing fees in remission, the exchanges, just like the brokers, are being forced to re-examine the services they provide to their customers and to better understand where their value add is and how they can remain profitable in the longer term. The fundamental reason for an exchanges existence has not altered: what is being debated now is the mix of products, services and technology to deliver this successfully.
Winners are already emerging. Higher margin exchange groups have chosen to diversify away from cash equity related transactions both vertically and horizontally. As Fixed income, derivatives, FX and other OTC markets become automated, exchanges will not only be expected to offer more multi-asset, multi-region and multi-currency services, but also to the same level of automation and service they currently offer for cash equities. This will require a significant increase in technology but deliver new more profitable revenue streams such as access to clearing and collateral management.
Newcomers are emerging to challenge the incumbents and are already countering the claim that European exchanges are heading for relegation. BATS Chi-x growing market share has been well documented but there are now more joining the party. Turquoise value traded has increased at a time when most other national exchange volumes are in decline. From data charges to order types, recent initiatives at Aquis, BATS Chi-X, and now Turquoise are offering the ability to trade pan European securities via a single connection, creating significant challenges for the national incumbents.
Evolving European regulation in a challenging economic climate may just be the catalyst required to overcome existing inertia and drive through necessary innovation in both product and pricing. There is the potential to map out a profitable future, but it will require radical change at European Exchanges to achieve this in order to truly leverage the vision of a single European market. Multi asset Pan European trading looks only to be getting started.
From investment to execution to settlement, who stood for what and why in European Capital Markets has fundamentally changed. Changing fund flows, reduced commissions and a persistent shift away from vanilla equity products across to alternative asset classes will require exchanges to continue to redefine their roles in order to survive. It’s all change at the Exchange.