There was a time when people who worked in the exchange world were, well, exchange people; steeped in the traditions and mind-dynamics of stock exchanges. How times have changed.
As exchanges broaden, diversify and globalise their product offerings and overlap increasingly with what used to be contained within the ambit of investment banking; as the importance of data and technology solutions starts to find a best fit and morphs towards third-party or shared industry solutions, exchanges seem well suited to anchor the shift and drive the agenda.
Banks are undergoing forced transformation through regulatory diktat, strategic re-think and profitability imperatives. They don’t have the option to credibly push back on their long-resisted move away from individual client propositions around data aggregation, storage and distribution, data feeds and reference data, collateral management, trading technology, clearing, settlement and custody, client risk management and other pre and post-trade services.
These are areas where there’s been serial and costly overlap between banks essentially offering identical channels and services. In a world of ROE optimisation and a focus on client value-add, the banks may finally have got the joke.
Investment banks in the future will be forced to – and should – focus their efforts on the front-end client engine that showcases intellectual content and leave pretty much everything else – all of the above plus generic IT – to joint or third-party aggregated solutions. The age of investment banking de-industrialisation is upon us. It’s an age that may not have been initiated by the banks but it’s nonetheless going to lead to better solutions for the industry and for shareholders, as banks weed out costs that don’t impact the client experience.
Exchanges as ersatz IBs
So where does that leave the exchanges? For a start, they’ve been hiring ever-more investment banking faces, both as a function of the headcount trauma the banks have been confronting but also because the changing landscape calls for an evolving skill-set. I’d been thinking about this phenomenon for quite a while, but the announcement of the third-time-lucky-maybe London Stock Exchange/Deutsche Boerse merger-of-equals gave me a perfect excuse to put pen to paper.
Exchange consolidation is hardly a new phenomenon – I reckon every major stock exchange group has tried at one time or another to get into bed with another or at least thought about it. With more investment bankers in the exchange world, you’d imagine that deal-making will only gather pace as opportunities shift up a gear.
Check out the executive cadres at LSE and DBoerse; the similarities are remarkable. On the LSE side, CEO Xavier Rolet spent eight years at Lehman Brothers until its demise, and previously worked at Dresdner Kleinwort, CSFB and did a 10-year stint at Goldman Sachs. Director of capital markets Raffaele Jerusalmi worked for some years at CSFB, as did CFO David Warren.
Suneel Bakhshi, CEO of LCH.Clearnet Group (part of the London Stock Exchange Group) came from Citigroup with over 30 years of experience in trading, banking and risk management, latterly as CEO of global markets in Japan. And in the past couple of weeks, Andrew Ross left Morgan Stanley to become CEO of CurveGlobal, the recent interest-rate derivatives venture between LSEG, seven major banks and the CBOE.
Then take a look at the upper echelons of Deutsche Boerse. Within weeks of taking over as CEO in the middle of last year, former Goldman and UBS man Carsten Kengeter had hired former Goldman and UBS man Rob Jollliffe to run global sales, as well as derivatives man Ashwin Kumar to run global product development. Kumar was a founding partner of hedge funds Meru Capital and Old Lane and worked at a host of investment banks, including CSFB and Citigroup. The overlap between the two is uncanny.
On the business front, Kengeter has given DBoerse a more investment bank-like demeanour, unveiling an aspirational programme last year to become “agile, ambitious and effective to participate in the global competition of financial market infrastructure providers with a strong customer focus” with a view to turning Deutsche Boerse into the provider of choice and top-ranked in all its activities.
He created a cross-divisional management committee, de-layered, reduced complexity, introduced a group-wide approach to sales, innovation and operations (ref the hires above), increased accountability via direct P&L responsibilities and offered better incentives.
On the acquisition front, he bought SIX Swiss out of its stakes of STOXX and Indexium to become sole owner, and gave the group its entree into the FX world with the acquisition of 360T. To finance the acquisitions, he did a €500m bond and a €200m ABB of treasury stock last autumn on 360T and a €600m hybrid to refinance STOXX and Indexium.
[As an aside, Kengeter dubbed his growth programme “Accelerate”. Rather lacking in imagination, if you ask me, as it’s the exact same name that UBS had given phase 2 of its own restructuring programme launched shortly before Kengeter left the bank. Sorry Carsten, I just couldn’t let it pass …]
If London and Frankfurt do the deal, it’ll be fun initially to watch the investment bankers on each side slug it out for the plum jobs. That would certainly add a soupcon of intrigue within another fascinating context: who’s taking over whom in a potential Brexit scenario.
By the same token, it would also give Europe quite a neat geographic segmentation on the equities side. London/Frankfurt would clearly be the leader in terms of its constituents’ nominal GDP and trading volumes; the now-independent Euronext (offloaded by NYSE) has cash and derivatives markets in Paris, Amsterdam, Brussels and Lisbon while its London platform offers aggregated liquidity, single-order benefits as well as a UK-regulated wrapper.
CEESEG AG has Central and Eastern Europe wrapped up with Prague and Vienna exchanges and co-operation agreements with pretty much every exchange you can think of and a few you never knew existed. Think Banja Luka, Belgrade, Bucharest, Budapest, Istanbul, Ljubljana, Podgorica, Sarajevo, Skopje, Sofia, Zagreb, and the Ukrainian State Agency, National Depositary and the PFTS exchange.
Nasdaq OMX has Northern Europe (all of the Nordic and Baltic countries markets bar Norway), leaving the independent SIX Swiss flying solo in Switzerland.
Mapping out the overlaps, gaps and opportunities beyond equities in derivatives, fixed-income, energy and commodity futures and options, clearing, technology and back-office and ancillary services between Europe and the US or between Europe and Asia could drive a merger circus or a series of carve-outs.
Here’s just one example, there are 14 separate equity option trading exchanges in the US but once you aggregate them across ownership groups, five groups have around 90% of the volume. Having had its 2012 merger with the New York Stock Exchange blocked, Deutsche Boerse had tried to sell its International Securities Exchange options business in the US (which it had acquired some years before) in order to fund expansion into Asia.
ISE remains on the books but with a deal with London in its sights, you have to wonder whether the German exchange believes it has a chance to increase its 16.5% market share against entrenched competitors – Nasdaq (24%), NYSE (19%) and CBOE (18%), or – bearing in mind its best-in-class metric – whether it will shift its priorities and re-order its properties.
I suspect the latter. Carsten Kengeter has been an investment bankers’ dream since he went over the wall to the exchange world. Are we about to see an M&A and divestment circus emerge as exchanges move centre-stage and dyed-in-the-wool deal-makers capitalise on the huge opportunities that lie in wait for the non-bank sector?