The London Stock Exchange (LSE) has set its sights on challenging European derivatives giants Eurex and NYSE Liffe, starting with the launch of equity derivatives on its multilateral trading facility (MTF) Turquoise in 2011.
Presenting the exchange group's results for the six months to 30 September 2010, CEO Xavier Rolet said the LSE had an opportunity to introduce new offerings in a derivatives space he described as “bereft of competition”.
The exchange already operates EDX London, its derivatives market for Scandinavian and Russian derivatives products, but Rolet emphasised the need for the LSE's derivatives strategy to be developed in close consultation with its customers. Turquoise is 51% owned by the LSE, with 12 investment banks sharing the remaining 49%.
“EDX has achieved a lot, but Turquoise is a partnership between a trading venue and its customers,” said Rolet. “This gives us a competitive advantage and the opportunity to partner with Turquoise's investor base when developing our offering.”
Turquoise's 12 bank shareholders currently account for around 65% of pan-European derivatives volume. Eurex, joint-owned by Deutsche Börse and SIX Swiss Exchange, and NYSE Liffe, the London-based derivatives arm of NYSE Euronext, traded US$740 million worth of equity derivatives in 2009.
Turquoise plans to leverage its parent company's existing assets and relationships to complete its derivatives offering and grab market share from Eurex and NYSE Liffe, according to CEO David Lester.
“We already have the clearing infrastructure for derivatives trading on EDX set up in our data centre, which uses CC&G [the Italian central counterparty owned by the LSE] technology combined with the risk management and clearing capabilities of [third-party pan-European central counterparty] LCH.Clearnet. This structure will also be used by Turquoise,” said Lester. “We also have 50% of the intellectual property in index provider FTSE, which will enable us to bring new types of derivatives products on to Turquoise with ease.”
Lester added, “I don't see this market fragmenting further than one or two additional players and I think each bank will choose one preferred partner for the trading of derivatives.”
The LSE has not yet confirmed the range of equity derivatives products that will be traded on Turquoise, but Rolet highlighted a need for greater depth in Europe's equity options market, which he noted as being highly illiquid at times because of the lack of competing offerings.
“We think competition from venues like Turquoise can enhance the quality and liquidity in the derivatives market – just as it did for cash equities,” said Rolet.
The LSE reported a 28% increase in operating profit for the six months ending 31 September 2010 to Â£122.9 million, from Â£95.8 million in the same period in the previous year. Secondary trading revenues – which accounted for 20% of overall revenue – fell to Â£103 million during the six months, 13% lower than last year. Average daily value traded in UK equities was up 7%, with the exchange reporting a stabilisation of UK market share at 62.8% over the period reported. Information services such as real-time data products accounted for 27%, or Â£87 million, of revenue.
Meanwhile, the LSE has extended its pricing promotion for high-volume traders until 31 March 2011.
The LSE launched the tariff in April, which charges a fixed maximum fee of 0.29 basis points for members that trade over Â£3.5 billion in continuous trading in UK equity and international order book securities in a calendar month. In addition, from January, the Â£3.5 billion threshold will be reduced to Â£3 billion and assessed on a three-month rolling basis.