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FOWi editorial comment:
Christmas may be cancelled and everyone’s belts are buckled on the last hole, but the London Stock Exchange spending spree continues unabated.
Heads of its derivatives business will be especially excited when they unwrap their latest toy on Christmas morning – 100% ownership of FTSE International. In addition to its recent successful bid to buy LCH.Clearnet, the exchange has done its best to secure the future of its budding derivatives business at a time when the markets face radical change.
On the surface, the FTSE deal is a further challenge to NYSE Liffe’s highly liquid FTSE 100 Futures contract. Are NYSE Liffe particularly unnerved by the implications of the move? At the moment, it seems very unlikely. After all, NYSE Liffe face more pressing concerns in 2012 than LSE’s Turquoise platform capturing market share.
The LSE’s acquisition of FTSE is instead a more long-term, strategic move. As David Lester of the LSE and Turquoise explained to FOWi, the business is a particularly rare asset and one of only two global equity benchmarking businesses.
To purchase the outstanding 50% stake in FTSE International will cost the LSE £450m ($703m). At that price, the benefits to the derivatives business will have to go beyond shoring up their trade in index futures and options.
Where the FTSE will ultimately boost LSE’s standing in the derivatives market is the potential it unlocks for product development.
In the coming years the FTSE is likely to create new benchmarks as the market evolves and the buy side’s requirements grow. New benchmarks will necessitate new products to trade and hedge against, and where the LSE hopes to shine in new contract development.
The problem for the LSE is that this is a long-term plan, while the threat to European derivatives is more pressing.
NYSE Euronext and Deutsche Börse made yet more concessions to the anti-trust authorities, indicating just how important the success of their £5bn ($9bn) merger is to both parties.
As if the threat of the world’s largest exchange coming into existence in 2012 wasn’t enough to focus the mind, then the espresso shot of the next wave of regulation will certainly do the job.
What the market may really need is innovation. The new BATS Chi-X Europe is set to become the largest trading platform in Europe, adding a derivatives offering through an agreement with Russell Investments.
This paves the way for a new set of contract launches, which in a similar way to LSE’s plans with the FTSE could increase competition and challenge NYSE Euronext and Deutsche Börse’s potential dominance.
Nicola Tavendale
FOW Intelligence
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