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Trading volume not enough to rescue bourse stocks

  Trading volumes at major European stock exchanges have surged in volatile markets this year, but this is unlikely to rescue their own shares from huge falls as investors stay nervous about bigger challenges the bourses face.


The shares could face more grief as growing competition, the disappearance of a merger premium and technical glitches hit stock exchanges in the region. “We are seeing a significant increase in competition around the world, which is putting downward pressure on these exchanges,” said Peter Dixon, UK economist at Commerzbank. “The outlook for the next few months doesn’t bode well because volumes are going to be under significant pressure.” Even robust volumes have not insulated the exchanges from sharp stock falls this year.

The total number of trades on the equity order books of the London Stock Exchange jumped 55% to a record 29.6 million in October from a year earlier, and trades executed on Deutsche Boerse’s Xetra platform soared 89% in October from a year ago to 30.2 million. But LSE shares have plummeted 70% this year, while Deutsche Boerse has slipped 60%. In contrast the FTSE 100 index of top British shares has fallen only 32% this year and Germany’s DAX is down 41%.

Competition fears loom large. Nasdaq OMX Europe, a cash equity platform set up by transatlantic exchange group Nasdaq OMX to rival European bourses such as LSE and Deutsche Boerse started in September. Alternative trading platforms such as BATS Europe, a unit of the US stock exchange BATS Holdings, Turquoise, a cash equities trading venue backed by nine investment banks, Chi-X Europe, owned by Nomura and investment banks, now account for over 25% of trading in FTSE 100 stocks.


And the exchanges could face even tougher times as trading volumes may fall as stability returns to the global financial system and markets regain confidence, shattered by the worst financial crisis since the Great Depression of 1930s. “Elevated volatility and repositioning has lifted volumes sequentially in October,” Merrill Lynch said in a recent report, referring to Deutsche Boerse.

“Looking forward, we think tougher macroeconomic conditions and a generally more benign market backdrop could result in softer volume trends in 2009.” Technology is also becoming a big issue. The LSE suffered its worst systems failure in eight years in September, forcing the world’s third largest share market to suspend trading for about seven hours and infuriating its users.

The UK Financial Services Authority, in its Financial Risk Outlook 2008 report, said the risk of such infrastructure failures is growing with the rise of electronic trading and straight-through processing. Valuations of exchanges are also not as supportive as in the case of the broader market and even less so compared with banks. Deutsche Boerse trades at 10.4 times next year’s earnings, according to Thomson Reuters data, while the LSE trades at around 8 times, at a premium to Germany’s DAX and Britain’s FTSE 100 respectively.

European banks trade at 5.7 times on average. “People discuss these stock exchanges as takeover candidates and a lot of hedge funds try to play that, but it just doesn’t work any more because of the current market circumstances,” said Anko Beldsnijder, managing director, MainFirst Asset Management.


Exchange stocks returned to the spotlight this week after a magazine report of merger talks between Deutsche Boerse and NYSE Euronext. Boerse said if such talks had been held, they had yielded no result. Its stock rose sharply on Monday and Tuesday, but such spikes in exchange stock prices are a rare occurrence this year, despite buoyant volumes.

Share prices of key stock exchanges jumped late last year on merger talks, but there has been no firm announcement. The LSE surged about 45% in about three months to the end of 2007, while Deutsche Boerse soared 75%. Shares have gradually declined since then.

In 2006, NYSE and Deutsche Boerse both bid for Euronext, with NYSE pipping the German company at the post. “There was certainly a premium on these stocks as everybody talked about being bought, especially the smaller ones,” said Philippe Gijsels, senior equity strategist at Fortis Bank. “The premium has gone now.” The battle for Euronext came after Deutsche Boerse had failed to take over the LSE, Europe’s top stock market, after a shareholder rebellion that cost the German group’s then chairman and the chief executive their jobs. (Reuters)