The London Stock Exchange (LSE) is reviewing its relationship with post-trade services provider LCH.Clearnet due to doubts over the firm’s “quality and resilience”.
Two weeks ago, global exchange group NYSE Euronext, which uses LCH.Clearnet for much of its European trading business, announced its intention to build its own clearing houses in Paris and London by 2012. NYSE Euronext accounted for roughly 43.5% of LCH.Clearnet’s equity clearing revenue in 2009. Following the announcement, ratings agency Standard & Poor’s put LCH.Clearnet on ‘CreditWatch’ status.
Speaking at the LSE’s preliminary 2010 financial results presentation, CEO Xavier Rolet said that “the [potential] downgrade in rating was a concern” and hinted that the exchange was looking at alternatives, such as bringing all clearing capabilities in-house.
“Post-trade services represent the biggest challenges but also the biggest opportunities for the exchange. The days of the horizontal exchange model are numbered,” said Rolet. “However, it will be important to ensure that a vertical model is not hermetically sealed and that users can enter or leave the process at a time of their choosing.”
Since Rolet’s appointment a year ago, the LSE has hired Kevin Milne, former CEO at post-trade reporting firm Xtrakter, as its director of post-trade services and has indicated that it may look to make more use of CC&G, the Italian clearing house acquired by the exchange as part of its takeover of Borsa Italiana two years ago. CC&G is already registered with the UK’s Financial Services Authority to conduct derivatives clearing business.
Reviewing the LSE’s achievements in the last 12 months, Rolet noted the successful outcome of its discussions with UK central securities depository Euroclear UK and Ireland, which reduced its fees for trade netting, a service it provides to the LSE on behalf of LCH.Clearnet. Rolet predicted an increase in algorithmic trading flow in the near future as a result of lower post-trade costs on the exchange.
The LSE chief appeared to take a relaxed approach to the continuing erosion of cash equities market share to multilateral trading facilities (MTFs). According to data vendor Thomson Reuters, the LSE’s share of FTSE 100 trading fell to 49.5% in April, from 56% in January 2010.
“Our market share has dropped but is holding up better than some may think,” said Rolet. “We think we will be in a better position to regain market share once the migration to the MillenniumIT trading platform is completed.”
The planned switch of both the LSE and Turquoise, the MTF purchased by the LSE at the start of this year, from the existing TradElect system to the Millennium Exchange trading platform designed by in-house technology firm MillenniumIT is scheduled for September. Rolet confirmed that the exchange group is actively identifying new ways to leverage the capabilities of Millennium IT, acquired in Q3 2010 for $30 million (£20.8 million), including developing smart order routing technology, surveillance and post-trade infrastructure.
Rolet added that the LSE would look for further revenue opportunities away from cash equities, particularly in value-added derivatives clearing services and the fixed income market. From 1 May to 18 May, the LSE reported that 39.89% of cash equity trading revenue came from the FTSE 100.
David Lester, CEO of Turquoise, said his priorities would lie in growing the MTF’s dark trading capabilities and making “the Turquoise brand extensible to other asset classes”.
Yesterday, volumes in Turquoise’s dark mid-point book surged to €307.3 million compared to an average of €134.1 million on the previous three days following worries that information leakage from competitors’ dark pools could be capitalised upon by high-frequency traders. Lester also emphasised that the main purpose of Turquoise’s dark pool would be for wholesale business and to give clients the opportunity to opt out of interacting with high-frequency flow.
In the financial year to 31 March, LSE total revenue was down 6% to £605.6 million. Adjusted operating profit for the exchange group was £280.3 million, £60.4 million down on 2009. A total of £25.3 million of costs were related to the replacement of TradElect.
UK equity trading revenues suffered a 35% decline to £101.8 million this financial year, compared to £156.2 million the previous year. Derivatives trading revenue was also down 26% to £19.5 million. However, Italian equity trading and fixed income trading were both up 7%, to £31.7 million and £29.3 million respectively.