A Contribution to the future strategy of the London Stock Exchange

Executive Summary

Strategy Group Members

Listen to Your Customers

Published by APCIMS

112 Middlesex Street
London E1 7HY
Tel: 020 7247 7080
Fax: 020 7377 0939

www.apcims.co.uk
info@apcims.co.uk

Tuesday 21st November 2000

Executive Summary

The failure of the proposed merger between the London Stock Exchange and the Deutsche Börse, and the London Stock Exchange's subsequent success in defeating a bid by OM Gruppen, provides a much-needed opportunity for the London Stock Exchange to put together a considered strategy for the future - as the leader of a new merged entity, as a member of an international alliance, or even as an ECN or ATS. Indeed, this is not so much an opportunity as an imperative: given what has happened to the London Stock Exchange, and what is happening elsewhere in Europe and in North America, change is inevitable and the status quo is not an option.

We acknowledge that the London Stock Exchange is in a difficult position, and we welcome its recent real change in attitude in discussing and consulting with its shareholders and market participants. It must embrace change, and perhaps radical change, and it must do so with its customers' approval. They appreciate that it operates within a broader environment over which it has only limited control. To its customers, changes in trading practice but without the relevant changes to clearing and settlement may not be very productive.

The London Stock Exchange cannot rest on its laurels. Although we are all very careful to deny complacency, there is an implicit assumption among UK policy-makers and many market users that London is still the best place to do business - best in terms of cost, best in terms of spreads, best in terms of regulatory touch. This may be a delusion.

In particular, spreads on SETS are significantly wider than on major Continental markets and on some principal US ones too. Meanwhile, Government has left untouched two significant issues which are a serious disincentive to doing business in the UK compared with other European countries: stamp duty, and full dematerialisation.

This Strategy Group makes six specific recommendations that are valid whatever decisions are taken about the London Stock Exchange's longer-term future:

The London Stock Exchange must move urgently to make fundamental changes to its present trading platform and to the trading services it offers. The aim must be to provide a more inclusive service than it does at present, to reduce costs and to narrow spreads.

It is a powerful indictment of the present system that the London Stock Exchange itself admits that 96% of non-institutional trade does not, at present, go through SETS.

• The London Stock Exchange must improve its marketing - not least by appointing a new Specialist Marketing Director at the main board level (at present, responsibility for marketing is mixed in with responsibility for strategy).

• The London Stock Exchange must at all times keep its eye on the goal of reducing costs to customers. This is not just a question of the trading platform; it requires a reorientation of management thinking.

• Regardless of where its future lies, the London Stock Exchange must move rapidly and aggressively to build up its cross-border business.

• The London Stock Exchange will remain ultimately accountable to its shareholders, but it must become more responsive to the needs of its customers.

• Recognising that trading is only part of the problem, the London Stock Exchange must involve itself constructively in the continuing debate over rationalisation and restructuring of European clearing and settlement systems. It carries tremendous moral authority in these areas. In this, it must act as an advocate for its customers - helping them drive down the total cost of cross-border and domestic transactions.

Whatever happens, the events of the last few months have made it clear that, if there is to be any formal link with another exchange, secondary trading must be governed by a single rule book and there must (at least) be a high degree of compatibility in regulations governing primary listings. This is a fundamental issue, and it must be dealt with at the outset of any discussions.

In order to obtain a clearer picture of the attitude of market users, APCIMS has polled approximately one-third of the London Stock Exchange's membership. Details of this survey are given in the paper.

The key findings are:

• Few respondents felt the London Stock Exchange could best serve its customers in the longer term without some form of a relationship with another exchange or exchanges;

• In general, alliances were preferred to a merger;

• While there was no consensus on a preferred partner, the alternatives that garnered most support were a link between the London Stock Exchange and NASDAQ and a tripartite alliance of the London Stock Exchange, NASDAQ and Euronext.

What is also clear from this survey, and from the work of the strategy group, is that customers are increasingly unwilling to accept that different exchanges should continue with different (and incompatible) technologies - all of which require frequent up-dating, which has to be paid for by the users themselves. Higher trading fees inevitably mean a worse deal for investors - so everyone pays in the end. In any scenario for the future of Europe's exchanges, at the very least compatibility of technology is essential.

The London Stock Exchange, therefore, faces a challenge - but it also faces an opportunity in that market and political pressures are now both pushing for solutions that will drive down costs, lower barriers to entry and facilitate cross-border equity trading in Europe. It cannot afford to miss this opportunity. If it does, someone else will eat its lunch.