Stock exchanges are complex machines, upon which economies ride, strive, and drive. The performance of these sophisticated engines depends on many factors, including market data, investment decisions, financial products, trading platforms, and post-trading activities such as clearing.
This market is dominated by six behemoths which account for roughly 56% of the industry’s total revenue. Needless to say, the London Stock Exchange Group (LSEG) is one of these.
To not fall behind its peers, it has decided to look East, to Asia. Yet, visibility on whether this bet will pay off, remains murky and riddled with uncertainty.
In fall 2020, the LSEG sold its Italian parts, specifically MTS and CC&G, the Italian Bourse’s respective principal trading platform and clearing house for government bonds, in order to acquire Refinitiv, a financial data company that also controls marketplace Tradeweb.
The LSEG acquisitions, combined with its Italian holdings, raised concerns in the Berlaymont regarding the dominant position of a non-EU-based institution in European bond trading and clearing activities.
In order to comply with the European Commission’s regulatory demand, London has agreed to sell its Italian assets, that is, MTS and the entire Borsa Italiana.
A fierce bidding saw Euronext – a conglomeration of European stock exchanges based in France, operating markets in Amsterdam, Brussels, Lisbon, Dublin, Oslo, and Paris – come out on top and secure these assets.
This is important, because intruth, trading accounts for 10% of what a stock exchange actually does.
For the LSEG, it is post trade services that bring in a whopping 36% of its revenue.
Silk Roads, and Coal and Steel
The success of the Eastward pivot of London will be dicey, especially for its newly acquired Refinitiv parts.
They strive on data, which is not always available in these markets. One just has to look at the recent blunder by the rating agencies with Huarong, whose parent company is the Chinese Ministry of Finance. And yet, there was little to no transparency.
Nevertheless, the recent earnings season saw the London Stock Exchange Group report a 3.9% rise in savings, putting it on track to hit its end of year target of 25% of 350M Pounds.
Furthermore, the synergies yielded by becoming the world’s second financial data giant behind Bloomberg LP, have yet to be fully reaped.
In fact, Refinitiv is key to propelling the group’s Asia presence, for which its leaders have been laying the groundwork by integrating their operations in the region. For example, through London’s recent announcement it is in talks with Beijing to increase the weighing of Sino-assets in its global indexes, as the group also owns FTSE Russell.
If these bets were to pay off one has to wonder if the Commission would decide, and the Court of Justice rule, against a Deutsche Börse and NYSE Euronext merger, as they did in 2012.
Hence, would a new reality, in which Euronext and NYSE are independent of each other, and in which LSEG is growing stronger via its international collaborations, clear the way for a future truly European stock exchange?