Exchange group NYSE Euronext's unveiling of a UK securities market to rival the London Stock Exchange (LSE) has generated more heat than light in the emerging competitive landscape between Europe's leading exchange groups.
On 14 July, NYSE Euronext announced that it had launched a London-based listings venue – NYSE Euronext London – based on the belief that it can offer international firms that want a London listing access to a wider range of investors than the LSE. In support of this, it claims that 55% of trading on its existing European markets is executed on behalf of UK, US and international investors. The implication is that NYSE Euronext can offer international firms a deeper and wider pool of investors than the LSE, which NYSE Euronext characterises as dominated by UK-based investors. Furthermore, the transatlantic exchange group suggests that a firm listed on NYSE Euronext London would find it easier to subsequently list in New York, but it acknowledges that issuers would still require the necessary US regulatory approvals.
The exchange also argues that secondary advantages will stem from the fact that NYSE Euronext London shares a technology base, known as the Universal Trading Platform (UTP), with NYSE Euronext's existing European exchanges. The firm contrasts this common central market environment with the London Stock Exchange, which it claims shunts non-UK firms onto the International Order Book (IOB), leaving them with access to fewer investors and poorer liquidity levels compared with UK-based main market participants on the SETS electronic order book.
NYSE Euronext London says that by listing both shares and depositary receipts (DRs) on the UTP, just like its European markets, it will create “Europe’s largest cross border equity exchange” with an estimated combined market capitalisation of €3.3 trillion and more than €6 billion of equity securities traded daily.
Ronald Kent, head of international listings at NYSE Euronext said NYSE Euronext London would offer international issuers in London with “global visibility”.
The LSE sees things somewhat differently. In particular, it strongly challenges the suggestion that international firms are treated as second-class citizens compared to UK-based firms.
It points out that the LSE offers a range of listing options to all companies, regardless of domicile: its premium listing requires higher standards of corporate governance and offers access to inclusion in a FTSE index; the EU standard listing allows firms to list either ordinary shares or depository receipts (DRs) in compliance with Europe-wide guidelines; and an AIM listing is offered for younger, more entrepreneurial firms. NYSE Euronext is offering to list all stocks on a EU standard basis.
The ordinary shares of UK and international firms that choose either EU standard or premium listings are traded on the LSE's main market, but DRs are traded on the IOB. The exchange rejects the description of the IOB as a backwater, pointing out that trading volumes in Lukoil and Gazprom DRs outstrip many constituents of the FTSE 100. “We segment DRs from ordinary shares as they are different in terms of structure and the issuers of these securities are subject to different regulatory obligations. The segmentation is to help investors but there is no difference in terms of trading,” a spokesperson said. The LSE estimates that the IOB turns over around $400bn per year.
Nor does the LSE accept that NYSE Euronext has broader investor reach. “A listing on the London Stock Exchange provides access to the largest pool of international equity assets in the world, with over $800 billion invested by European, North American, Middle Eastern and Asian investors, either based in the UK or overseas. As all of the major European funds have access to, and invest in London listed securities, it is an erroneous claim to suggest that NYSE Euronext London can expand the pool of capital for companies,” says Tracey Pierce, head of equity primary markets, LSE.
But some argue that NYSE Euronext's case is not without merit. “NYSE Euronext is in a position to underline its access to European investors
with its five markets including the new London platform,” says Andrew Mitchell, equities analyst, Macquarie. “With New York a relatively expensive option for international issuers, firms may weigh up this new offer against the more established LSE brand. Nevertheless, short-term demand is likely to be limited.”
Without full disclosure, it is hard to split rival claims on reach, but the LSE has a hard-earned reputation as a leading international listings venue and is not about to give it up lightly. Of all international companies traded on major exchanges, more than one third is traded across its books; trading in international companies accounts for 31% of trading on the LSE.”We have the global expertise, knowledge of the London capital markets, and the track record in attracting international listings,” asserts Pierce.
Over the past five years, international firms have raised over Â£32 billion in London, compared with about Â£30 billion raised by UK firms. And in a market depressed by economic uncertainty, 41 firms still raised Â£2.15 billion from the debut listings on the LSE in the first six months of 2010. Twelve of these were international firms, including Essar Energy of India and African Barrick Gold, which are now constituents of the FTSE 100. Currently non-UK firms listed on the LSE total 600, originating from 70 countries, with a combined market capitalisation of Â£1.8 trillion. A total of 325 of these are listed on the main market (including 137 GDRs) with 230 residing on aim with the balance spread across other LSE markets, which include the Professional Securities Market and Specialist Fund Market.
The ultimate prize is likely to be somewhat larger than the primary market fees (Â£69.2m) that contributed around 11% to overall LSE revenues in the financial year ended 31 March 2010. Pierce says 2010 so far has proved more successful than 2009 and is optimistic for the future. “Market conditions remain difficult but our pipeline of companies looking to list remains very strong and we expect a continued flow of international IPOs in the medium term,” she says. Likely sources include firms from Russia, CIS and India as well as companies from new markets in Mongolia, Indonesia and Vietnam.
Clearly, the LSE intends to maintain its strong position in international issuance, but is this about more than listings? After all, the relationship between the two exchange groups has turned distinctly frosty this year as both firms have had to fight back against the multilateral trading facilities that have eaten into trading volumes in London and Paris. NYSE Euronext executives were openly dismissive of LSE CEO Xavier Rolet's announcement last month of his ambitions in the derivatives market and several have commented on the timing of NYSE Euronext's latest announcement: the London venue was launched via a series of videos on the morning of the LSE's annual general meeting. Evidently irked, the LSE has called into question NYSE Euronext's commitment to France, noting that the London listing venue follows the announcement of a new data centre in Basildon, Essex, which will house much of the US-French group's European trading technology. This in turn sparked a rebuttal this morning from Dominique Cerutti, president and deputy CEO of NYSE Euronext, who said, “Paris, our European headquarters, will remain by far the largest of our listings markets in Europe and our day-to-day centre of management for all our European cash operations and the development of our UTP.”
Herbie Skeete, managing director of Mondo Visione, a publishing company specialising in exchange information, suggests that NYSE Euronext's listings initiative may be regarded as a “kite-flying” exercise that will cost relatively little if it proves unsuccessful, but could bring a new revenue stream to the group that leveraged its existing technology. Skeete suggests that the LSE's Rolet may not be “quaking in his boots” at the prospect of a rival listings market in London, but he argues that the UK-based exchange group may have a mountain to climb in the derivatives market. “I'm not sure that it's possible to organically build a credible derivatives business from scratch,” he says.
Initiating coverage of the LSE yesterday, Barclays Capital's equities team describes Rolet's strategic initiatives as “sensible”, but appears to agree with Skeete that the road ahead is challenging, due to a mix of revenue sources that is over-reliant on businesses under intense competitive pressure. Nevertheless, BarCap sees opportunities for further cost-cutting and sees the recent acquisition of Millennium IT as positive for strengthening existing businesses and entering new ones.