Comment: Now or never for Europe’s exchanges

February 17, 2014 11:29 am

Comment: Now or never for Europe’s exchanges

By Philippe Carré

European businesses are in a bit of a bind. The eurozone, with the exception of Germany, is depressed and the continent’s businesses need to invest to compete with their rivals in America and Asia.

However, money is an extremely scarce commodity, even in spite of the historically low interest rates. The usual route, borrowing from banks, is being obstructed by the need for these banks to fill the estimated €400bn hole in their balance sheets.

The alternative is to raise money from the market. In the US the capital markets serve as an excellent source of alternative finance, with a well-developed route to market for everyone from ‘mom-and-pop’ store chains to nascent tech titans who have little prospect of profitability for a decade.

Time and time again Europe’s politicians and businessmen talk about the need to create an efficient pan-European market that operates in the same way, but national interests and local complications have always got in the way.

However, a crucial step towards kick-starting the reorganisation of European capital markets has just taken place – ironically in the US, withIntercontinentalExchange’s takeover of NYSE Euronext. While the “new” NYSE faces an uphill battle in the US in an ever-changing and tough environment, the merger sends its European equities exchanges, Euronext, back to where we were eight years ago.

The European equities market has become a much bleaker place since those days. A host of venues, multilateral trading facilities, systematic internalisers, dark pools and other new fully fledged exchanges, have been chipping away at the monopoly positions of the incumbents, buoyed by regulatory changes such as Mifid.

With no sign of these headwinds abating and continued pressure on finding funding for business, there is a serious need to ensure a strong capital markets structure remains.

Ideally this would be pan-European. It does not take a genius to see that a combination of a “relative few” European equity markets, including the London Stock Exchange Group, Deutsche Börse and Euronext would be able to offer access to a much larger number of stocks within Europe.

Through a joint-venture like structure, European exchanges could pool their resources in the equities field to give themselves a chance to survive in a competitive globalised environment

Offering a large part of European liquidity under a combined umbrella, those exchanges could pool their knowhow, expertise and exploit the synergies of operating similar businesses across the region.

This new entity would be able to compete on a quasi-equal footing with rivals that sprung out of Mifid, while also fighting for listings and trading with venues outside Europe.

Getting access to such a platform has long been a request of the investment community, which has grown tired of the continued fragmentation of European capital markets along national lines and under multiple market structures.

That pan-European entity would be kept on its pricing toes by the “old” newcomers, such as BATS Chi-X Europe, “new” newcomers such as the newly launched Aquis Exchange

and the emergence of dark pools offering pan-European access to stock trading.

Such a venture would stem from different concerns, for example the London Stock Exchange keen to keep an access to the European market for IPOs, Euronext backing itself to a strong entity against a difficult future, Deutsche Börse able to focus further on Asia, but would also enable each of its constituents to work on other strategies, such as derivatives, clearing or developing new products and markets, flagged as key to their future successes.

This would in turn act as a very strong catalyst for others to join. It could include Bolsas, central European exchange CEESEG, the Warsaw Stock Exchange, SIX Group, maybe even at some point even the Moscow Exchange or Borsa Istanbul.

Through a joint-venture like structure, European exchanges could pool their resources in the equities field to give themselves a chance to survive in a competitive globalised environment.

Logically, one cannot see the European Commission rejecting the idea of exchanges pooling equity assets to compete against competitors in the same way they dismissed the DB/NYSE merger. Mifid has encouraged strong competition, as evidenced by thelatest success of BATS Chi-X in the Spanish equities market.

Letting exchanges pool resources to fight global competition without their hands tied behind their backs in their national backyards against potential opponents seems only natural, especially since all are under severe pressure.

This would be a true European project, based on market capitalism principles, built by private business for the use of other economic participants. It sounds like a radical idea in Europe right now, but that is precisely the one that underpins the nature of the European single market – and fundamentally drives the European Union forward.

Surely national regulators will like it too, the Euronext model showed how national regulators can be made to work together while retaining their individual franchises.

Getting English, French and Germans to agree on anything would most probably be a major issue here. More seriously, though, a key issue is at stake – European capital markets. That may be enough to get brave men and women to stand up. Never has the need for Europeans to come together been greater.

Philippe Carré is global head of connectivity at SunGard’s capital markets business