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Thursday, October 20, 2011

LSE chairman says exchange mergers benefit investors

From eFinancialNews
Mergers between international exchange groups will benefit both investors and capital raisers, the chairman of the London Stock Exchange group said, as he conceded that the LSE was caught 'flat-footed' by the growth of high-speed trading.

Speaking at the Marketforce European Exchanges Summit in London, LSE Group chairman Chris Gibson-Smith said combining international exchange groups would help build “larger, more liquid markets with larger groups of customers,” merging liquidity pools and establishing wider international investor bases.

Impending regulatory reform of the global securities markets is further driving international cooperation among the world’s exchanges, he added, as US and European authorities implement rulemakings which will establish a new class of trading platforms for securities contracts.

Earlier this year, the LSE had its merger bid with Canadian exchange operator TMX Group rejected by the latter’s shareholders, amid an outcry from Canadian banks and brokers aimed at keeping the country’s stock and derivatives trading within national borders.

Gibson-Smith pointed to the merger agreement between rival exchange groups NYSE Euronext and Deutsche Börse and the Singapore Exchange’s bid for the Australian Securities last year as examples of the same drive for international cooperation. The LSE’s own bid for Liffe, now NYSE's derivatives platform, was rejected in 2001.

Gibson-Smith highlighted the initial Mifid reforms in Europe – which saw the LSE lose monopoly control of UK share trading – as one of the original spurs to the current round of international mergers between exchange groups, as exchanges pooled their resources in the face of competition from upstart trading platforms.

The first Mifid directive and the resulting “explosion” in new ultra-fast trading venues caught the LSE “flat-footed” on the trading technology front, he said. But he argued that the exchange could now offer high-speed trading “as well as anyone.” The LSE bought pan-European equity MTF Turquoise from a consortium of its founders, including trading firms, in 2009. It also purchased technology firm MillenniumIT, a Sri Lankan developer of high-speed trading systems, for £18m.

Despite seeing its TMX bid rebuffed, the LSE still has other acquisitions in its sights. It has entered exclusive talks with Anglo-French clearer LCH.Clearnet, the world’s largest clearer of over-the-counter derivatives, over the purchase of a controlling stake, and is rumoured to be considering a joint bid with SGX for the London Metal Exchange. The LSE has refused to comment on any potential LME bid.

Though much regulatory activity and market interest is focused on reform of secondary trading markets, Gibson-Smith said the LSE’s “deep social purpose” remained capital raising for corporations in primary markets. Roughly half of corporate financing in the Europe now comes from bank lending, Gibson-Smith said, with the proportion much higher in the US. It was staggering, he added, that some UK small and medium-sized businesses were even turning to credit card lending to finance borrowing.

Regulatory policy needed to address corporate desire to raise debt capital rather than equity capital, he suggested. At present there is little global coordination on issues such as tax relief for equity investors, he pointed out.

Gibson-Smith has been with the LSE Group since 2003, following a long career with UK oil giant BP. He is rumoured to be stepping down at the end of his current term, due to end next year, though the exchange has yet to comment publicly on the subject.