June 11, 2010

Co-Authors

Justin Schack

Director

Joe Gawronski

President and COO

Rosenblatt Securities Inc.
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Rosenblatt’s Market Structure News Digest 

Global Exchanges and Market Centers

LSE Signals Europe Derivatives Foray
—Financial Times

The London Stock Exchange on Tuesday signaled a frontal assault on Europe’s two largest derivatives exchanges – Eurex and NYSE Liffe – saying it planned to build a pan-European derivatives business within nine months. The move underscores the UK bourse’s ambitions to enter the derivatives business at a time when most of its global peers have long had such businesses.

Our Take: The lack of a substantial derivatives business has long been LSE’s Achilles heel. Without the market capitalization or cash to acquire one, the company is trying to build from scratch. It does so in the face of very long odds. Moving trading interest from either NYSE Liffe or Eurex will be impossible without some unique advantage. In the past, as with Eurex’s wresting of Bund futures volume from Liffe, offering electronic trading against a pit-traded product could provide such an edge. But all major European derivatives are electronically traded today. Competing on price or even latency within that automated environment is not enough to move business from one exchange to another. LSE CEO Rolet notes in this piece that the company plans to offer capital efficiencies between equity derivatives and cash positions. It also is reportedly re-evaluating its relationship with LCH.Clearnet for cash equities clearing. One potential endgame here is that LSE adopts the clearing and settlement entities it acquired from Borsa Italiana to function as the primary post-trade providers for the LSE equity market, and then launches equity derivatives that clear through the same infrastructure. That would give it a shot at capturing a piece of the prized UK equity derivatives market (capital efficiencies wouldn’t really be meaningful for non-UK/Italian stocks unless LSE could boost the pan-European market share of its recently acquired MTF Turquoise, which currently clears through Euro CCP). But it would still be an uphill climb.