CEO Xavier Rolet has given the London Stock Exchange “six to nine months” to successfully implement its strategy to consolidate its share of the UK cash equities trading market and has suggested that a positive outcome to acquisition discussions with rival trading venue Turquoise is “around the corner”.
Presenting the exchange group’s financial results for the six months to 30 September 2009, Rolet said that the LSE’s ability to meet the competitive challenge posed by multilateral trading facilities (MTFs) would be determined by the outcome of cost reduction initiatives, the rollout of new technology and changes to the post-trade environment. “We’re playing for time. Six to nine months is the time it will take to say whether we have executed our UK cash equities strategy well,” said Rolet.
Rolet said that a lot of progress had been made since the announcement in October that the LSE had entered into exclusive discussions to buy Turquoise, an MTF originally established by leading investment banks disaffected by what they viewed at the time as monopoly pricing by the exchange. “Some kind of conclusion is around the corner,” he said. Pressed on the likely outcome, Rolet admitted, “We are leaning in the direction of a deal.” He confirmed that the second phase of the rollout of Baikal, the LSE’s non-displayed trading and liquidity aggregation service, had been postponed pending the outcome of the talks with Turquoise. Refusing to be drawn on the how Turquoise and Baikal would co-exist within the LSE Group, Rolet said that LSE’s aim was still to offer a pan-European venue that would provide dark and lit capabilities.
The exchange’s half-year financial statement suggested that progress on cost control had already yielded results, with non-recurring costs of £180.2 million, down 8% against the first half of the LSE’s 2009 financial year. The LSE made changes to its fee structure for UK cash equities in September 2009, removing the previous maker-taker pricing model, and further changes will come into force on 1 December, when the minimum £0.10 fee will be charged per executed order rather than per execution. Rolet said that “no stone will be left unturned” in the pursuit of cost reductions and reasserted the exchange’s commitment to further changes to fee structures, indicating also a likely simplification of the existing tariff structure, in part to take account of the growing use of smart order routing.
Claiming that post-trade fees can account for two-thirds of members’ trading costs, Rolet said the exchange continued to work with post-trade providers LCH.Clearnet and Euroclear to reduce the current tariffs for clearing and settling UK cash equities trades. “We would like Euroclear to move from gross to net fee billing,” said Rolet.
He said that offering clearing via Cassa di Compensazione e Garanzia, the Italian clearing house acquired with Borsa Italiana in 2007, remained one of a number of options under consideration. Rolet acknowledged that resolution of post-trade issues also depended heavily on regulatory deliberations. At the end of October, LCH.Clearnet announced that deals to establish interoperability between itself and other central counterparties (CCP) had been halted by concerns from regulators about inter-CCP margin requirements. Rolet suggested that such issues might have been addressed earlier, but expressed hope that “a level playing field” would result from the intervention to create a competitive landscape for exchanges and venues.
The exchange’s half-year results included a £20.4 million non-recurring cost following the acquisition of MillenniumIT in September 2009. The Sri Lanka-based systems firm was purchased primarily to boost the LSE’s internal technology capability, with the replacement of its TradElect matching engine for cash equities high on the exchange’s list of priorities. Rolet said the acquisition would enable the LSE to remain “in control of its destiny and innovate cost-effectively”, but declined to provide a more specific timeline for the introduction of a new trading platform than the previously announced plan to go live before the end of 2010.
In its interim results statement for the six months to 30 September, 2009, the LSE said group revenues, at £310.9 million, were down 9% at on the same period last year, due to “continuing competitive and difficult markets in cash equity trading”. The exchange reported underlying operating expenses of £180.2 million in the six months to September, resulting in an operating profit of £134.8 million and profit before tax of £79.4 million.
In September, the LSE accounted for 62% of trading in FTSE 100 stocks, with pan-European MTF Chi-X Europe taking a 19% share, BATS Europe 7% and Turquoise 6%, according to data provider Thomson Reuters.