While attention has focused on the mega-mergers across Europe of EuroNEXT (Paris, Brussels and Amsterdam) and iX (London-Frankfurt) other smaller bourses have quietly had a very profitable time. One of these is Borsa Italiana in Milan.
Although seemingly ignored by the EuroNEXT negotiators, Milan is negotiating with Frankfurt and London, according to all three parties, and one look at this year’s performance suggests that EuroNEXT may have made a strategic mistake in not trying to bring Milan on board. Now it seems that, along with Madrid, it will almost certainly be one of the first European bourses to join iX once the merger gets under way.
With its market capitalisation making it Europe’s fourth largest exchange, it is surprising that it has been short of suitors, despite being a member of the European Alliance, and with a growth and new-tech exchange part of the EuroNM. Indeed, over the past three years, market capitalisation has more than tripled, and now represents over 65% of GDP. Last year also saw a year-on-year increase in turnover of almost 30%.
Behind these figures is an obvious increase in listings and activity. At the beginning of March there were 268 companies listed on the Italia Bourse. This represented a substantial increase on the previous year, but the Milan board believes that as many as 500 Italian companies meet the requirements for a full listing, and 200 could be listed on the Nuovo Mercato. The latter certainly could prove to be a growth area, as to date it has not attracted as many companies as hoped. In that, however, it shares a problem with other European high- growth markets which have been outperformed and outmanoeuvred by the Frankfurt Neuer Markt.
The listings mean that in equities Milan boasts 348 shares, 25 warrants and 1,584 covered warrants. It also trades 139 government bonds on its fixed income market, a further 479 bonds and 24 convertible bonds. The derivatives market is also returning to previous peaks in terms of activity and instruments. There are two index futures, one index option, 27 stock options and four interest rate contracts. The IDEM exchange is now ranked only just behind Liffe in terms of notional turnover.
All the above are distributed by 135 intermediaries and 10 remote members, who are expected to double Milan’s turnover this year.
There are a number of reasons for such optimism. Firstly, the success of the electronic matching system, which is only outperformed in Europe by the Frankfurt model.
This has also been shadowed by a return of foreign investors, which had deserted Milan in recent years. Although it has not reached previous peaks, it now represents a respectable one third of all activity.
Secondly, in terms of costs, only Paris and Frankfurt can claim to be more efficient. Milan’s costs represent only around half of the worldwide average. This increase in efficiency and competitiveness, for which the board deserves great credit, has resulted in the record number of listings.
Nor is the board resting on its laurels. As mentioned above, negotiations with iX are under way and progressing in a satisfactory manner, according to both sides. Also the board is keen to develop the Nuovo Mercato, although it may now be that a closer relationship with iX will mean those plans are changed slightly, as Frankfurt is the natural home for all new economy stocks within iX. To begin with, however, there will be dual listing, and this may help Milan in the short term.
New technology is also combining with more traditional trading, with a new Euro MOT platform in place in Milan for the bond market. The board has also moved to introduce a new corporate governance code on a voluntary basis, but perhaps one of the more innovative moves this year has been the introduction of after-hours trading.
Prompted by the increasing importance of on-line trading, the board and shareholders earlier this year extended hours by 30 minutes either side of regular business, and then introduced an after-hours trading period. They identified two problems for the equity market, one was trading after the close of the daily market, a problem exacerbated by the Bank of Italy rule on the daily valuation of mutual funds portfolios at reference price, and the problem of trading at that price faced by institutional investors.
The trading works with a cross order book coming into operation at the close of the market. This phase facilitates the execution of pre-arranged trades between two parties, with members acting as agents or principals, at the reference price which is set as an average of the last 10% of the traded shares. The minimum value of these cross orders depends on the type of instrument. In the case of shares it is e25,000 and covered warrants e10,000.
This period is followed by a continuous trading period, when orders are entered at prices within a pre-defined range of the reference price. The system automatically matches these trades, but the range is designed to limit excessive price fluctuation. The variation limits for blue chip, mid-cap and Nuovo Mercato stocks is plus or minus 3.5%. The margin is based on the overnight volatility between the reference price and the morning’s opening trading price. The first step in after-hours trading began on May 15 and the board set the closing time of 8:30 but this will be put back to 10:00 later this year.
All in all, Milan looks an attractive partner, and EuroNext may well be regretting allowing iX to steal a march in its direction.

Topics