When the London Stock Exchange started the hunt for a successor to Dame Clara Furse, its chief executive of eight years, it was not obvious who might rush to take her place.
Given the array of challenges facing the 207-year old exchange, it is hard to see who would be in a hurry to take the top job.
Some names being bandied around include three internal candidates – Doug Webb, chief financial officer, Martin Graham, head of markets and David Lester, head of technology – as well as Martin Wheatley, chairman of Hong Kong’s Securities and Futures Commission and Robert Elstone, current chief executive of the Australian ASX exchange.
In the past six months alone, the LSE has suffered a massive system outage that brought trading to a halt for almost a whole day, witnessed the arrival on the scene of three new competitors – armed with cheap fees and fast trading systems – and watched as its partner in a key strategic venture, Lehman Brothers, imploded.
Today, the LSE unveils earnings for the first six months of its latest fiscal year ending in March 2009. Since its last earnings, the shares have fallen by 43 per cent, underperforming the FTSE Mondo Viseone Exchanges Index by about nine per cent.
Dame Clara will likely point out that the financial turmoil has benefited the LSE, as extreme volatility has driven healthy trading volumes and raised the total value of shares traded.
Volatility has also, at times, tended to encourage traders to route trades to the exchange, rather than to the four new alternative trading platforms competing with the LSE: Chi-X, Turquoise, Nasdaq OMX Europe and BATS Europe. That is because general market concern over counterparty risk has burnished perceptions of incumbent exchanges as safer places to trade.
Yet there are nagging doubts over the LSE’s cost base. The exchange took the fight to the new platforms in September with a new fee structure of price cuts and incentives for a breed of high-frequency, or “algorithmic”, trader. But the rival platforms are still cheaper and have captured market share in FTSE 100 stocks.
The LSE’s problem is that it may not be able to afford significant further fee cuts without also making substantial cuts to its cost base as well. This week, the Swiss exchange said it would move its London-based Swiss blue chip operation back to Zurich due to cost pressures.
Richard Evans, head of electronic execution for Europe at Citi, says: “The incumbent exchanges typically have a much bigger cost base so it’s unclear how they prevent this migration of liquidity from continuing.”
Significantly, Citi now sends over half of the orders it handles not to the LSE, but to the alternative platforms.