Lost in Liffe’s shadow

The IntercontinentalExchange (ICE) bid for NYSE Euronext demonstrates just how important derivatives revenues will be for exchanges, but appears to leave the future of key European equity markets in doubt.

The US$8.2 billion deal is a clear ploy by ICE to gain control of the NYSE Liffe European derivatives business - something Deutsche Börse failed to do last year. As part of the deal, ICE has suggested a potential IPO of Euronext, primarily consisting the French, Belgian, Dutch and Portuguese stock exchanges NYSE bought in April 2007, subject to "value creation".

For a start, ownership of NYSE Liffe would give ICE, which has which has historically focused on energy and commodity derivatives, control of popular exchange-traded derivative contracts. These include European and UK short-term interest rates (~55% of NYSE Liffe revenues), FTSE, CAC and AEX index derivatives (~20% of revenues) and single-stock equity derivatives (~15% of revenues). These products would bolster ICE's nascent European derivatives clearing house, ICE Clear Europe.

As a side note, it appears ICE's European operations will benefit regardless of whether the merger becomes a reality.

A clearing services agreement that would switch clearing of NYSE Liffe contracts from LCH.Clearnet to ICE Clear Europe has also been signed and is expected to happen even if the acquisition fails. This saves NYSE Euronext from investing in an ambitious project to build its own London-based clearing house.

But revenue opportunities for Euronext's European equities rump may not be so forthcoming, rendering its future most uncertain.

In the last 12 months overall revenue at NYSE Euronext was US$2.39 billion, of which only €560 million (US$728 million) came from European equity trading, listing and information services.

It is doubtful whether the IPO of European equity markets on a standalone basis is an attractive investment option - trading volumes remain anaemic and competition in the form of low-cost, high-tech multilateral trading facilities (MTFs) remains a real threat, with a new wave of innovative venues expected to launch during the course of this year.

This leaves a potential opportunity for Europe's biggest exchanges - the London Stock Exchange Group (LSEG), Deutsche Börse, Nasdaq OMX, Bolsas y Mercados Españoles, SIX Swiss Exchange - to strengthen their stock trading business.

Continued pressure from MTFs- which currently hold around close to 30% of European equity trading - would make an acquisition of domestic equity markets less likely to run into the antitrust issues that have dogged previous deals. But interest from large exchange groups in a Euronext purchase could founder on technology.

Euronext markets are currently hosted on NYSE's common Universal Trading Platform, meaning a new owner without similar capabilities would sooner or later have to build or buy new technology at a potentially high cost.

This would make the purchase most attractive for either the LSE, which owns technology vendor MillenniumIT, Nasdaq OMX, which has been rolling out its INET trading platform to markets globally, or Deutsche Börse, which has found success in extending its Xetra technology to bourses in Eastern Europe.

The number of unknowns ICE's NYSE bid presents when it comes to the future of Euronext markets means the situation will be watched closely by exchange groups, including overseas players like Hong Kong Exchanges and Clearing, BATS Global Markets and Direct Edge, and could spark the next exchange M&A merry-go-round.