Founded in 1801 the London Stock Exchange (the exchange) has been one of the world’s leading international exchanges for over two hundred years. For much of that time, however, while the exchange has moved premises on numerous occasions, the basics of its business have remained largely the same. Indeed it is probably over the last 25 years, that the exchange has undergone its most significant changes.

Many of these changes have been in response to external factors such as increasing economic globalisation and widespread regulatory upheaval in financial markets bringing increased competition. In the face of such change, however, and characteristic of the resilience that has brought success over so many years, the exchange continues to adapt to ensure its long-term sustainability.

“Certainly, in the late 1990s, early 2000s, we moved into a period when exchanges became more global in their outlook, rather than being nationally focused as traditionally was the case,” says Doug Webb, Chief Financial Officer at the exchange. “And it was important for the London Stock Exchange to see how it could become a more global organisation.”

A global outlook
In October 2007, the exchange merged with Italy’s Milan based Borsa Italiana. The deal provided broader geographic exposure, as well as bringing a broad range of assets into the group, some in areas where the exchange had little exposure. These included post trade clearing and settlement businesses, and also a greater breadth of products in trading areas such as derivatives and fixed income.

“It also brought the benefit of scale allowing us to leverage IT investments across multiple markets, for instance, and move assets around between the two,” says Webb. “You see an example of that recently in the UK, with the launch of the new retail enabled bond market, which is about taking successful a model already running in Italy and replicating it in the UK.”

With trading speed and technology also increasingly important, in October 2009 the exchange bought Sri-Lankan based technology services group, MillenniumIT. The company is an established provider of exchange technology, including trading surveillance, smart order routing and post trade systems.

“Exchanges provide the infrastructure for financial markets, and infrastructure today is heavily dependent on the quality of information technology that you deploy,” says Webb. “In the past, both London Stock Exchange and Borsa Italiana have tended to have outsourced IT models, where the development was carried out by a third party.

So the primary focus with the Millennium acquisition was to gain full control of market leading information technology.”

One of the biggest changes in capital markets in recent years has been the impact of the Markets in Financial Instruments Directive (MiFID), providing harmonised regulation for investment in the European Union. By opening up cash equity trading to competition across the whole of Europe, the directive has created a market for new entrants. Since 2007, and the launch of Chi-X, there has been a spate of Multilateral Trading Facilities (MTFs) created which compete in equity trading with traditional exchanges.

As well as taking steps to make itself more competitive, the exchange also acquired a majority stake in the Turquoise MTF in February 2010, merging it with its Baikal dark pool platform. On top of the existing nine global investment bank shareholders, three additional global banking clients joined the venture as shareholders.

“The reason we purchased Turquoise is that it gives us exposure to pan-European trading,” says Webb. “While the exchange trades UK securities, and Borsa Italiana trades Italian securities, Turquoise trades securities across 23 markets throughout Europe and so for us it was a very efficient way to gain that pan-European exposure. If we had stayed in the UK and Italy only, we would be missing out on providing an offering for 65 percent of all European trading.”

The purchase also provided the opportunity for the exchange to work more closely with its customers. Previously, the exchange sometimes saw its customers more as competitors than clients, says Webb. But part of the firm’s key strategic focus over the last year has been getting much closer to its clients and working with them collaboratively.

“So we are working closely with our customers on Turquoise, through a joint model that puts us firmly in control of the operation, but positions them as partners, and potential beneficiaries of our success. We have already responded to one of their clear strategic messages by announcing that Turquoise will start to trade US as well as European equities.”

As for the future of MTFs generally, Webb points to the fact that all the MTFs are loss-making operations, and investors are growing more reluctant to continue investing in businesses with potentially unsustainable business models.

Diversification
As part of its strategic evolution, in order to create a more long-term sustainable business, the exchange continues to diversify its product and services offerings across the three main areas of capital markets, information and technology, and post trade services.

So in capital markets, for example, the exchange provides opportunities for investors to invest in the companies that raise capital at IPO and through further fundraising. It also allows investors to trade those companies’ shares as well as a range of other instruments. In addition the exchange owns derivative exchanges both in the UK and Italy. It also trades fixed income products, and has a majority stake in the leading wholesale electronic platform for government bonds.

Information and technology represents about a third of the exchange’s revenue. Activities can be divided broadly into two groups. Roughly one half is the provision of real time market information, to Bloomberg, Reuters and Proquote screens, for example. The rest is composed of a broad range of activities such as the FTSE index joint venture, which has achieved double digit annual growth recently.

“There is an ever increasing need for index products in a market that requires expanded benchmarking capabilities as passive investment strategies become relatively more popular,” says Webb.

As part of its move to diversify, the exchange is expanding the range of products and services it offers clients in the information and technology businesses. So, for example, as the speed of trading and latency are such important issues in modern trading, the exchange is providing a service that meets the demand from high frequency traders and major brokers to locate their trading engines in the exchange’s data centre.

The purchase of MillenniumIT is another example of the move to change the mix of exchange’s information and technology business. LSE bought Millennium primarily for in-house reasons. However, says Webb, with MillenniumIT well known for its technology, and already selling exchange and exchange related systems, the backing of the Exchange’s brand and reputation is already having a positive benefit on the Sri Lankan firm’s  order pipeline.

In post trade the exchange has very efficient businesses in Italy including clearing, settlement and assets it will continue to leverage. At the same time the Exchange has focused on reducing the cost of clearing in the UK.

“We have spent a lot of time recently, for instance, focusing on the cost of post trade services in the UK, which have become a significant barrier to trading growth,” says Webb. “As part of that effort we have managed to extract some beneficial changes from Euroclear to their tariffs, which will reduce the overall cost of trading to our clients by around £10m per year. And, of course, we continue to focus on how we can make post trade more efficient in the UK.”

A secure future
Great companies evolve and adapt to the times, and the Exchange is no exception. It has the advantage of being located in one of the world’s leading financial centres, but also maintains a truly international outlook as globalisation gains pace.

“London, as a financial centre, is very much international, that is one of the big advantages we have,” says Webb.

“We put together our offerings in a way that are very attractive to our customers, and are also part of a much wider community, which is a key advantage; the amount of international money which is managed in London, and the knowledge and expertise on hand relating to global companies and global markets, the leading lawyers and accountants located in the City of London, are really important.”

Indeed, as Webb points out, recent events have underlined the important role the LSE plays in the global economy. “Obviously we have just been through a period where companies have struggled to raise money with the debt markets closing and I think the worth of the equity markets became very clear, with record amounts of capital raised in rights issues to see companies through such a difficult period.”

And, in an increasingly uncertain world, experience, brand and reputation, also carry a lot of weight.

“You want to have a trusted and independent player providing the infrastructure that allows people to both raise capital and trade instruments in the market. We provide equal access – opportunities for companies of all sizes to raise money and equally for investors to invest in and trade the securities in those companies. And we are much focused on ensuring that the high standards that you have come to expect from the Exchange’s markets are retained.”

The exchange continues to thrive. With its well established brand, and increasingly global outlook, it is well placed to continue evolving its business and maintain its pre-eminent role in the global financial services market, says Webb.

“We are a market that is open to everybody, that you can rely on, that has been around over 200 years and will be around for the next couple of centuries at least.”