Broad business models pay off for exchanges

Diversification strategies by exchange groups have performed well and are helping drive strong revenue figures in Q1 2014.

Diversification strategies by exchange groups have performed well and are helping drive strong revenue figures in Q1 2014.

Exchange operators have also benefited from a broader uptick in equity trading volumes seen since the beginning of the year as macro economic conditions improve.

London Stock Exchange Group saw its third quarter (January-March 2014) income rise by 48% year-on-year to £308.9 million while nine-month year-to-date income increased by 38% to £876 million. Discounting LCH.Clearnet, revenues grew by 13%.

Its capital markets business was up 21% due to improved trading in cash equity and fixed income while information and technology services also performed well, up 16% and 17% respectively.

Deutsche Börse Group also saw a strong start to 2014 and noted its cash equities and post-trade business performed particularly well. Net revenue increased by 6% across the group to €514.2 million. Its Xetra segment, which covers equities trading, increased revenues by 19% to €43.5 million and its Clearstream post-trade business saw income rise by 7% to 169.9 million.

Nasdaq OMX saw particularly strong performance in its non-core operations. Information services earnings grew by 23% in Q1 to US$123 million, while its technology division saw revenues increase 26% to US$135 million compared to Q1 2013.

Herbie Skeete, managing director of exchange information provider Mondo Visione, said the larger groups that have diversified their business models are seeing the strongest performance.

“All exchanges have seen an uplift in their performance as equity market volumes have improved this year, but those that run both a cash and derivatives business and can also leverage sales of their technology, are storming ahead,” he said.

“Those that are just focused on the cash segment simply can’t do very much to improve their revenues aside from generating more operational efficiencies.”

Aside from expanding into a broader range of business areas, geographical diversification is also becoming important, and both Deutsche Börse and Intercontinental Exchange (ICE) have recently signaled their intent to do more business in Asia. Deutsche Börse has been particularly active in signing deals with local operators this year, including the Bank of China and Thai Stock Exchange.

Skeete commented: “Asia is really seen as a key area of growth for cash equities businesses, as there is a huge number of IPOs expected in the region over the coming years. Exchange groups are also pushing to sign joint ventures with exchanges in the region to launch derivatives trading facilities.”

ICE’s results are due to be published on Thursday and are expected to show difficult trading conditions on its derivatives markets, though it’s also likely to announce significant savings made as a result of integrating its business with that of NYSE Euronext, which it acquired late last year.