A little over a year ago we were tempted by the prospect of a merger between the Deutsche Börse and the London Stock Exchange (LSE). Well, nothing became of the proposed iX but Euronext, the joint venture between the AEX (from Amsterdam), Brussels Exchanges and the Paris Bourse has gone from strength to strength and can reasonably legitimately call itself the ‘first European bourse’. But it is still not a real challenge to the LSE and can hardly call itself: ‘Europe’s stock exchange.
We are therefore still a long way away from the demise of individual country stockmarkets, but we are certainly on a transition, although I doubt it will be a smooth transition to more internationally minded exchanges.
Whilst the London Stock Exchange still has to work out what to do about the future a real new competitor has emerged in the shape of Virt-X, a London-based stock exchange that started operating in June. The biggest boost to its chances of success came after the new exchange gained approval from the American Securities and Exchange Commission (SEC) to sign up US investors before it had even started to operate. I predict that, for once, the LSE will face some real competition.
Apparently, SEC approval is notoriously hard to win, and Virt-X is the only European stock exchange currently to hold it. This must really annoy the Federation of European Stock Exchanges (FESE), which recently promised to step up its efforts to get the SEC to open up American securities markets to non-US exchange operators.
At the moment the SEC appears to consider that European securities exchanges are less well regulated than their US counterparts, a position that irritates FESE members, and that competition would therefore not be fair.
Virt-X, short for ‘virtual exchange’, was created when the Swiss stock exchange (SWX), merged with Tradepoint, a London-based trading platform owned by a consortium led by Instinet, one of the world’s largest electronic agency securities brokers. Last year Tradepoint received SEC approval itself, but it had not signed up any US investors and the licence effectively expired when it merged with SWX.
One of the most surprising features of the creation of Virt-x was the willingness of the Swiss to agree to see trading in their blue-chip stocks move to London. It is difficult, if not impossible to imagine Frankfurt, agreeing to make that move. In fact I think it was the unwillingness of the Deutsche Börse to move most of its trading to London which really killed iX, not a proposed takeover by the Swedish exchange OM.
The big Swiss institutions, however, have some influence and with UBS and Credit Suisse, to name but two, having huge investment banking operations in the City of London, the move has caused surprisingly little fuss in Switzerland. Zurich does however retain trading in small Swiss stocks, so this must have helped deflect any dissent.
With a consolidated market structure, Virt-x is addressing the increasing requirement for blue chip equity investments to be made on a pan-European sectoral basis rather than within local markets. It is surprising that it has taken so long for the exchange operators to realise this.
With more than 500 stocks to be traded on Virt-x – which initially includes constituents of all the top pan-European indices and the major local market indices (SMI, FTSE Eurotop 300, Dow Jones Stoxx, S&P Europe 350, MSCI Euro & Pan-Euro, CAC 40, DAX 30, MIB 30 and AEX) – the exchange will trade stocks which account for 80% of European trading by value.
However, the first requirement for a shift in liquidity from one stock exchange to another is competitive two-way prices. Although it is still early days the signs are clearly already there. Virt-x has two real challenges – whether liquidity can migrate from one exchange to another and whether it is possible to overcome national sensitivities.
The big question for pension funds is whether this new initiative will lead to lower costs and more efficient trading. Competition is usually good for the consumer as it reduces complacency and, in this case, there already appears to be evidence that spreads are reducing. The more efficient operator will of course find it easier to bear lower margins but at the end of the day it is volume that counts.
If Virt-x wins consistent business outside its Swiss market, it could become Europe’s stock exchange on its own. If however it fails to move beyond its Swiss market base then the LSE will probably buy it and with enhanced good regulation, a larger number of blue-chip stocks and a huge pool of investable capital, a real trans-European stock exchange could be created.
Either way we seem to be assured that London will continue to be the centre of the European securities market. Watch this space!