LSE prepares for freer life

For the first time in more than two years, the London Stock Exchange is contemplating life as an independent company without a suitor breathing down its neck.

Beginning with the ill-fated approach in December 2004 by Deutsche Börse, the LSE then considered tentative offers from Euronext, saw off a hostile bid from a consortium led by Australia’s Macquarie Bank and is now expected to see off Nasdaq, headed by Robert Greifeld.

LSE and its advisers refused to comment on Friday night on the outcome of Nasdaq’s bid, which expires at 1pm on Saturday. But with the LSE’s shares closing higher than Nasdaq’s offer price on Friday, the conclusion seemed foregone.

It must be a sweet moment for Clara Furse, the LSE’s chief executive who has seen off four potential suitors and, in the process, helped more than triple the exchange’s share price.

In the process of seeing off suitors, the LSE has unveiled a raft of shareholder-friendly measures including borrowing to finance a series of share buy-backs – the latest of which could begin as soon as Monday – tight cost-control measures and the delivery on time and to budget of a new, high-speed share trading platform.

However, its new-found freedom comes at a challenging time for the LSE and other European stock exchanges.

First, new European regulations aimed at promoting competition, known as MiFID, take effect in November. These will help exchanges compete with each other and ease the entry of new competitors in the form of Multi-Lateral Trading Facilities (MTFs).

Worse, the LSE’s largest customers, chafing after years of largely unheeded complaints about its costs, have vowed to launch their own MTF to compete with it. They have also formed a platform, known as Project Boat, to compete with exchanges for their information services business.

The LSE says it is not complacent and has plans to take on the competition. Already it has unveiled tariff reductions equivalent to a 10 per cent across-the-board cut.

With the bids out of the way, the LSE is expected to say it will buckle down to its core business, proceeding with several initiatives which are already in train.

One such initiative is the launch of a derivative based on the growing number of Global Depositary Receipts of Russian companies seeking a London listing. While the business remains small, volumes have doubled to 47,000 contracts in January, double that of the first month of trading.

Of all the projects, the most significant is its new TradElect trading platform due in June.

To capture the rising volumes from high-speed “algorithmic” trading, the LSE has invested in new technology.

TradElect will reduce what is known as end-to-end latency – that is, the time it takes for the system to process a customer order once received – to 10 milliseconds. The system’s capacity to handle orders will increase fourfold.

Already, the LSE’s newly upgraded technology has delivered huge jumps in volumes. Average Sets daily trading volumes soared 52 per cent in the year to December. For the first 10 trading days of January, volumes rose again, averaging 397,000 and the LSE predicts a further rise to 480,000 bargains a day.

But, having turned down £12.43 a share in cash from Nasdaq, the LSE is under pressure to keep up the pace. “We believe the LSE remains over-valued on a stand-alone basis and do not expect other bidders to appear in addition to Nasdaq,” analysts at Credit Suisse wrote two weeks ago.

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