European exchanges continue to outperform
A report from Morgan Stanley and consultancy firm Mercer Oliver Wyman says that European exchanges will continue to outperform through cost-effective trading and clearing. Exchanges with a broad business portfolio and, in particular, exposure to derivatives and clearing, but also scale and operating leverage, are best placed to benefit.
While it predicts that revenue growth will slow to 4%-6% a year in the next three years compared with about 20% revenue growth between 1998 and 2001, it states that profitability will improve and the industry will generate E1.6bn ($1.8bn) in annual profits by 2005.
The most successful exchanges will be those able to access new revenue streams, in particular, by developing a strong franchise in buoyant non-equity asset classes and innovating services in clearing.
European exchanges have proven to be a cycle-resilient part of the financial services industry. Increased trading velocity has helped to offset the weakness of earnings from cash markets: the current bear market has brought an increase in cash trading driven by a 10%-15% reduction in trading costs in the past two years, increasing hedge fund activity and high market volatility.
According to the report, in the UK the value of trading fell only 4% in 2002 – while the FTSE fell 25% – and the number of trades grew by 16%. London Stock Exchange equity trading revenues for the UK rose an estimated 15% last year, including international total trading revenues, which rose 8%.
A buoyant derivatives market, driven by greater sophistication in risk management, wider buy-side demand for derivatives, new products and modest cannibalisation of cash markets, will be a major growth driver, accounting for almost half of the revenue increase in 2005. In the past 18 months, exchange traded derivatives have grown faster than over-the-counter products for the first time in a decade, says the report.
Spanish and Mexican exchanges make tech deal
MexDer, the Mexican derivatives exchange, has partnered with MEFF, the Spanish futures and options exchange, to launch an options exchange in Mexico.
The deal covers the provision, installation and application of MEFF’s trading system to be used for trading on the options exchange in Mexico through MexDer. Additionally, the MEFF Institute will provide training courses for MexDer personnel, as well as for traders, market makers, brokers and investors.
Although no definite timeline has been stated, the launch can only take place once all the participants of the deal have endorsed the corresponding legislative framework, and the technical and operational procedures have been put in place and fully tested.
The MEFF trading system, called S/MART, is currently also used by the Portuguese futures and options exchange, and the WTB of Hannover, Germany. The contracts that are initially planned for listing on the Mexican Options Exchange will be a selective share-price index of the Mexican Stock Market and options on some of the most liquid shares traded. The partners say that there are also opportunities to launch products together and for possible tie-ups between the two markets.
