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Merrill Lynch's Bob Wigley seems firmly established as bookies' favourite to take over from Dame Clara Furse as chief executive of the London Stock Exchange later this year. But whoever gets the job — Wigley, Alasdair Haynes of share-crossing network ITG or even the leading internal candidate, deputy chief executive and former Borsa Italiana head Massimo Capuano — will take over at a very difficult time.
There are several reasons for this. The tide is turning after years in which exchanges have seen continually rising volumes and revenues. December figures showed that derivative volumes were down by more than a fifth at the Chicago Mercantile, the world's biggest exchange, and by a quarter at Eurex. Turmoil in the markets and the implosion and deleveraging of the global hedge fund industry get the blame.
Markets heavily into energy and metals fared rather better, albeit against a background of falling prices, and ICE Europe and the London Metal Exchange have few complaints. However, the picture in equities is more mixed. The move to computer-driven algorithmic trading tends to deliver increased volumes as big orders are sliced up into thousands of small parcels, but the pressure on revenues is the other way.
December figures from Xetra, Deutsche Börse's trading platform, showed this. Its volumes are higher but the value of what was traded fell by a third. London fared better but faces a bigger competitive threat from the onslaught of cherry-picking rival trading platforms such as Chi-X, Turquoise, Bats, Nasdaq OMX and probably Equiduct.
But even this may not be the real challenge.
Rather it is political. There is a view in the US and Europe that stock exchanges have been hijacked in recent years, so their true purpose has been lost. This ought to be to mobilise capital for business, but you would hardly know it these days. Using technology, the investment banks and their core clients have made secondary share trading the primary function.
While we might have thought this churning of existing shares added to market liquidity and efficiency, it has brought with it the downside of greater volatility. Violent share-price fluctuations in even the largest companies undermine the ability of the market to fulfil its primary capital-raising role, and frighten off genuine investors.
So some politicians are talking seriously — though quietly — about killing the casino element and returning stock exchanges to their roots by using the tax system to discriminate harshly against short-term trading while favouring long-term holders. There are no serious proposals on the table yet, but it is early days. It would be easy to do, and it would probably be hugely popular with the voters.
Cashing in on capital-raising
Confirming the idea that when one door closes another opens, Scottish and Southern yesterday became the latest company to turn to the stock market to raise finance. Guided by Credit Suisse and Merrill Lynch as book-runners and with four banks as underwriters, it set out to raise £500 million with a placing of 40 million shares, amounting to just under 5% of its total share capital.
What is immediately interesting —apart from the relative ease with which the company appeared to be getting the money — was the number of banks involved for what in historic terms is not a large sum of money. It was not so long ago that one bank would comfortably commit to underwriting half a billion pounds on its own — in HBOS's case it often did rather more. These days, though, no bank is willing to stick its neck out.
There was a similar pattern before Christmas with Centrica's £2.2 billion rights issue to raise the cash to buy into British Energy. That had a consortium of seven banks involved: Goldman Sachs, Credit Suisse and UBS as book-runners and HSBC, BNP Paribas, RBS Hoare Govett and Barclays Capital as lead managers.
It underlines how the equity capital-raising business is changing under the impact of the credit crunch, putting new emphasis on the need to assemble and hold together a banking syndicate for the underwriting. And the bigger the issue, the bigger the syndicate needs to be, given that no one has much appetite for a large amount of risk.
That in turn gives an edge to those corporate brokers and securities houses that have banking connections — Hoare Govett, now owned by RBS, being a case in point — in that if a bank has a lending relationship with a company, it is likely to be in pole position to join the syndicate, and it is then up to the skill of its advisory team to leverage that into a book-running role and possibly even a full broking relationship.
Given the resurgence of equity capital-raising, such firms are very well-placed for what looks like being a very active year.
