It was just a few years ago that Europe’s main stock exchanges were generally seen as cornerstones of their home nation’s economy and identity. But this view has changed in recent times.
They are no longer member-owned clubs providing companies with a platform on which to raise capital. Companies such as Facebook have raised equity finance away from traditional exchanges, a move that threatens to challenge their raison d’être.
Increasingly, exchanges are driven by the need to make profits, and they are often listed themselves with external shareholders to satisfy.
Following the advent of the Markets in Financial Instruments Directive (MiFID) in 2007, the core business of many exchanges – that of share trading – has been opened up to competition. The emergence of new competitors to Europe’s former national exchanges has prompted a fundamental question: What is the role of a stock exchange?
Exchanges are responding to these new challenges and have realised they need to re-invent themselves and adapt.
Earlier this year, after a period of relative quiet, consolidation in the exchange sector hit the headlines once again. The London Stock Exchange’s announcement that it intended to merge with Canadian operator TMX Group was trumped immediately by the news that NYSE Euronext and Deutsche Börse planned to join together to create the world’s largest stock exchange.
This redefining of the exchange landscape is likely to result in the creation of a handful of huge exchanges and a number of smaller exchanges that focus on a particular region, sector or product. Real commercial opportunities will exist for exchanges that become niche, offer new services, or develop a specific type of expertise.
The key to capitalising on these opportunities will be product innovation and serving the precise needs of a specific subset of clients.
It’s not surprising that exchanges are seeking to innovate and develop new product lines in the face of fierce competition and falling revenues. Dealogic estimates that the value of European IPOs was $3.5bn in the first quarter of this year, half the value of deals in the same period in 2007. It is clear that those that fail to innovate are unlikely to survive.
But exchanges must be careful not to forget the important role they play as venues for helping companies to raise capital. This is a vital function. In the UK, small and medium-sized businesses employ about 60 percent of workers and are crucial to the economic recovery. Exchanges must still provide a home for smaller, fast-growing companies and help them achieve their business objectives by providing an ecosystem for raising capital.
Nemone Wynn-Evans is chief financial officer of PLUS Markets Group, a London-based stock exchange and a market operator providing cash trading and listing, derivatives and technology services.
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