Economic confidence and the evolution of the 21st century exchange


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by Ronald Kent (Executive Vice-President, Head of International Listings, NYSE Euronext and CEO, NYSE Euronext London)

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Economic confidence and the evolution of the 21st century exchange

  1. 1. Economic Confidence and the Evolution of the 21st Century Exchange March 2011 © NYSE Euronext. All Rights Reserved.
  2. 2. Table of Contents 1. Why Russia Demands Modern Liquid Financial Markets 2. What is Happening Outside Russia in the World's Financial Markets 3. NYSE Euronext's Strategy and What it Means to be a Global Exchange in the 21st Century 4. Technology @ the Heart of NYSE Euronext’s Business 5. NYSE Euronext’s Evolving Contributions for Developed and Developing Markets 6. Russia’s Capital markets Evolution
  3. 3. NYSE Euronext Why Russia Demands Modern Liquid Financial Markets
  4. 4. Capital Markets Factors Contributing to Robust GDP Growth <ul><li>Dynamic domestic capital markets with depth in which investors have confidence </li></ul><ul><li>Capital Markets fully connected to the domestic and global economies </li></ul><ul><li>Effective risk hedging tools for businesses and investors </li></ul><ul><li>Efficient access to affordable capital for companies of all sizes </li></ul>
  5. 5. Moscow as a Global Financial Center (An International View) Strengths <ul><li>Deep pool of well-educated personnel </li></ul><ul><li>Flexibility of labour market </li></ul><ul><li>Access to international sized customers </li></ul><ul><li>Size of financial markets large and increasing </li></ul><ul><li>Favourable geographical location, time-zone </li></ul><ul><li>Challenging business environment, unpredictable legal system </li></ul><ul><li>Shortage of business infrastructure and professional support services </li></ul><ul><li>Uncertain and unfavourable corporate tax regime (1) </li></ul><ul><li>High operating costs </li></ul><ul><li>Complicated visa regime for international personnel </li></ul>Weaknesses <ul><li>Economic base not diversified </li></ul><ul><li>Infrastructure development does not keep up with business growth </li></ul><ul><li>Large portion of economy is government-controlled </li></ul><ul><li>Under-developed small business sector burdened by regulations </li></ul><ul><li>Market and banking supervision does not keep up with requirements </li></ul><ul><li>Rapidly increasing wages due to rising competition for talent </li></ul>Threats Opportunities <ul><li>Growing propensity and consumerism </li></ul><ul><li>Potential hub for growing CIS economies </li></ul><ul><li>Under-developed financial sector attracting international players </li></ul><ul><li>Individual investments will grow fast due to wealth and educational levels </li></ul>Source: International Banking. A Unique Opportunity for Russia, April 2008, Citi
  6. 6. Moscow as a Global Financial Center (A Russian View) <ul><li>Development of Moscow as a leading international financial center </li></ul><ul><li>Integration of the City’s financial sector into international financial market as the significant element </li></ul><ul><li>Development of efficient and competitive financial infrastructure in Russia </li></ul><ul><li>Development of conditions for stable capital inflows into Russian economy from international capital markets </li></ul><ul><li>Formation of modern national financial system meeting the best international standards </li></ul><ul><li>Development of labor market in financial sector of the City </li></ul><ul><li>Creation of financial image of Moscow as international center and improvement of confidence level among investors </li></ul>Expected Result Measures 1 2 3 4 5 6 7 Financial Infrastructure Development Introduction of New Financial Instruments Attraction of New Participants to Financial Market ↑ Financial Regulations & Corporate Governance Development of Social and Business Infrastructure Tax Reforms on Financial Markets ↑ C ompetitiveness of the Russian Economy Source: State Debt Committee of the City of Moscow, 2009. Moscow Government Resolution No. 445 – GR
  7. 7. NYSE Euronext What is Happening Outside Russia in the World's Financial Markets
  8. 8. Evolution of Economic Trends since Pre-Financial Crisis Trend Market Forces Globalisation Greater Connectivity between Markets De-regulation Competition <ul><li>↑ Trade </li></ul><ul><li>↑ Competition </li></ul><ul><li>↑ Financial Interdependency </li></ul><ul><li>↑ Sensitivity to Downturn </li></ul><ul><li>↑ Consumer Choice </li></ul><ul><li>↓ Information Asymmetry </li></ul><ul><li>↑ Layers of Complexity </li></ul><ul><li>↑ Execution Risk </li></ul><ul><li>↑ Economic Activity </li></ul><ul><li>↑ Liberalised Markets </li></ul><ul><li>↑ Risk-Taking </li></ul><ul><li>↓ Level Playing Field </li></ul><ul><li>↑ Innovation </li></ul><ul><li>↑ Consumer choice </li></ul><ul><li>↑ Predatory Pricing </li></ul><ul><li>↑ Obsolescence </li></ul>Positive Negative
  9. 9. Evolution of Public Capital Market Trends since Pre-Financial Crisis Pre-Financial Crisis Evolving Market Structures Evolving Clients Technology Enablers <ul><li>Integrity of Transparency </li></ul><ul><li>Liquidity </li></ul><ul><li>Regulated Exchange </li></ul><ul><li>Monopoly </li></ul><ul><li>Traditional National Exchanges (s) </li></ul><ul><li>New Competing Venues </li></ul><ul><li>Multilateral Trading Facilities (MTFs) </li></ul><ul><li>Dark Pools </li></ul><ul><li>Fund Managers </li></ul><ul><li>Retail Investors </li></ul><ul><li>Hedge Funds </li></ul><ul><li>High Frequency Traders </li></ul><ul><li>Floor Trading -> Electronic Trading </li></ul><ul><li>Electronic Trading -> Ultra High Speed / Latency -> Data Centre Co-location </li></ul><ul><li>Fragmentation </li></ul><ul><li>Complexity </li></ul><ul><li>“ Over-the-counter” or unregulated environments </li></ul>Impact on Financial Markets: Post-Financial Crisis
  10. 10. NYSE Euronext NYSE Euronext's Strategy and What it Means to be a Global Exchange in the 21st Century
  11. 11. NYSE Euronext: Adapting to External Market Trends Re-regulation “ Deleveraging” – Less Capital Available More Competition Radical Changes in Technology Global Capital Flows Trend Impact <ul><li>More transparency </li></ul><ul><li>Focus on risk management </li></ul><ul><li>Return to regulated markets </li></ul><ul><li>Algo-firms grow influence </li></ul><ul><li>Capital efficiency really matters </li></ul><ul><li>Harder to make money in just trade execution </li></ul><ul><li>Clients need to “re-aggregate” markets </li></ul><ul><li>Higher costs of trading infrastructure </li></ul><ul><li>Firms looking for solutions and expense reduction </li></ul><ul><li>Rising cross-border trading and risk management </li></ul><ul><li>Higher demands for global access </li></ul>
  12. 12. New Area, New Opportunities, New Solutions, New NYSE Euronext Issuers: > 2,200 Total Mkt Cap: €15.9tr AD Trading 1 : €89.2bn Issuers: > 1,100 Total Mkt Cap: €3.6tr AD Trading 2 : €6.3bn 14:30 GMT 9:00PM 8:00AM 16:30 European Markets Open US Markets Open London Paris Amsterdam Brussels Lisbon <ul><li>NYSE Euronext offers issuers solutions to serve their financing needs </li></ul>Fast Path + NYSE Euronext Markets Open Continuously 11 hours Source: Bloomberg, NYSE Euronext Research, as of December 31 st , 2010. 1) Average Daily Trading value last 6 months. 2) Average Daily Trading value last 12 months. Note: USD/EUR (Average last 6 months): 0.75606. USD/EUR (as of December 31 th ): 0.75455.
  13. 13. <ul><li>Globally markets are increasingly fragmented following the deregulation of financial markets (MIFID, NMS) </li></ul><ul><li>NYSE Euronext is building a market with open architecture to attract the greatest number of issuers and investors by developing the deepest pools of liquidity </li></ul>NYSE Euronext – Ready for the Evolving Market Environment NYSE Arca NYSE Liffe US NYSE Euronext NYSE Alternext NYSE Liffe NYSE Arca Europe Universal Trading Platform NYSE NYSE Amex Investors Investors Investors Investors US Regulation European Regulation
  14. 14. Stock Exchanges - No Longer a Commodity <ul><li>Impact of deregulation on corporate issuers and investors has been profound: </li></ul><ul><ul><li>Decrease in transparency and price discovery </li></ul></ul><ul><ul><li>Liquidity fragmentation – difference between super liquid stocks and “the rest” </li></ul></ul><ul><ul><li>Differentiation between investors and traders increasingly blurred </li></ul></ul><ul><li>Exchange differentiation driven by technology, regulatory integration and their ability to provide connectivity between investor groups and pools of capital </li></ul>+ Trading Market Share Breakdown by Exchange (US, Continental Europe, UK) Source: Thomson Reuters and NYSE Data Gateway as of December 31st, 2010. Includes OTC trading both in Europe and in the US.
  15. 15. Proposed Exchange Consolidations accelerating + + + + +
  16. 16. NYSE Euronext Technology @ the Heart of NYSE Euronext’s Business
  17. 17. The rise of the Picosecond – the Need for Speed! Second Millisecond (1/10^-3) Microsecond (1/10^-6) Nanosecond (1/10^-9) Picosecond (1/10^-12) 3.3 picoseconds “ Time taken for light to travel 1 millimeter” 1.02 nanoseconds “ Time taken for light to travel 1 foot” 3.33 microseconds “ Time taken for light to travel 1 km” 1.00 milliseconds “ Time taken for light to travel 300 km” 1.00 second “ Time taken for light to travel 300,000 km” <ul><li>Speed = Trading and Market Advantage? </li></ul>Common measurement
  18. 18. Building global liquidity hubs <ul><ul><li>NYSE Liquidity Hubs are co-location centers for the NYSE Euronext global community, which support the most demanding levels of high-frequency and algorithmic trading </li></ul></ul><ul><ul><li>These hubs host a diverse range of internal and external markets </li></ul></ul><ul><ul><ul><li>NYSE Classic, NYSE Arca, NYSE Amex, NYSE Arca Options, NYSE Amex Options </li></ul></ul></ul><ul><ul><ul><li>NYSE Liffe, Euronext, NYSE Arca Europe, SmartPool </li></ul></ul></ul><ul><ul><ul><li>Third-party markets, dark pools, and client firms trading across multiple markets </li></ul></ul></ul><ul><ul><li>Solutions can be segmented for each user group </li></ul></ul><ul><ul><ul><li>Cost and bandwidth options supporting market makers, high volume traders, sponsored participants and standard members </li></ul></ul></ul><ul><ul><li>Value-added services facilitating low-latency trading </li></ul></ul><ul><ul><ul><li>Outsourced/hosted solutions (consolidated market data, sponsored access with risk filtering) </li></ul></ul></ul><ul><ul><ul><li>Graduated service levels (hardware and cabling specifications, rack and stack, monitoring and maintenance) </li></ul></ul></ul>
  19. 19. Our Technologies Product Portfolio <ul><ul><li>The heart of the exchange solution is the Universal Trading Platform (UTP) </li></ul></ul><ul><ul><li>UTP is a multi-market, multi-geography and multi-regulation exchange platform </li></ul></ul><ul><ul><ul><li>Supporting regulated, unregulated, lit and dark markets over a broad range of asset classes </li></ul></ul></ul><ul><ul><ul><li>Offering significant technology synergies over individual platforms </li></ul></ul></ul>
  20. 20. NYSE Euronext Teams up with Goldman Sachs in Trading Venture <ul><li>In December 2010, NYSE Euronext & Goldman Sachs teamed up to create a new kind of trading structure – Sigma X </li></ul><ul><li>The Sigma X MTF is a dark pool, executing trades on non-displayed quotes </li></ul><ul><li>The MTF facility uses software, services and facilities from the technology division of NYSE Euronext </li></ul><ul><li>Trades done on Sigma X will take place in NYSE Euronext’s purpose-built data center in Basildon, UK, which offers co-location services to high-frequency and other traders </li></ul><ul><li>Regulation, fragmentation of trading across multiple types of venues and intense competition is forcing exchanges and banks to work together </li></ul>“ Traditionally, we are known for operating global markets, but this is the first time that our trading platform and our infrastructure have been chosen by a major broker dealer”. Stanley Young CEO of NYSE Technologies.
  21. 21. NYSE Euronext NYSE Euronext’s Evolving Contributions for Developed and Developing Markets
  22. 22. NYSE Euronext Global Reach and Multi-Asset Capability
  23. 23. Selected Global Partnerships <ul><ul><li>Qatar Exchange </li></ul></ul><ul><li>Technology and derivatives consultancy </li></ul><ul><li>September 2010: Launch of UTP for cash equities market </li></ul><ul><li>Derivatives markets being developed </li></ul><ul><ul><li>Tokyo Stock Exchange </li></ul></ul><ul><li>October 2009: Launch of Tdex system on NYSE Euronext platform </li></ul><ul><li>October 2010: TOPIX futures in London </li></ul><ul><li>JGB Futures to adopt same OI transfer mechanism </li></ul><ul><ul><li>Warsaw Stock Exchange (WSE) </li></ul></ul><ul><li>Technology consultancy and strategic development </li></ul><ul><li>UTP for cash and derivatives live in 2012 </li></ul><ul><li>Create order routing link to CEE region </li></ul><ul><li>Open WSE products to NYSE Euronext’s SFTI connected community </li></ul>
  24. 24. Chinese Issuers Recognise The Need to Raise Capital Outside of Domestic Markets <ul><li>Outside Chinese core domestic markets, NYSE Euronext was the market of choice for Chinese Issuers with 23 companies raising $2.9bn in 2010 </li></ul>Source: Dealogic, Includes all IPO Equity issuance from Chinese Nationality Issuers in 2010. Note: China Agricultural Bank IPO allocated to HKSE for representation purposes. Hong Kong Stock Exchange IPO Market Cap: $191.7bn Capital Raised: $38.2bn No. Companies: 66 NYSE Euronext IPO Market Cap: $13.6bn Capital Raised: $2.9bn No. Companies: 23 Shenzhen IPO Market Cap: $157.8bn Capital Raised: $33.4bn No. Companies: 226 Shanghai IPO Market Cap: $118.2bn Capital Raised: $20.3bn No. Companies: 32
  25. 25. Domestic & International Markets are built on Strong Connections Brazilian IPO Issuer Brazilian Issuer with global business seeks Dual Listing on BoveSpa & NYSE Euronext Euroclear now offers clearing & settlement in both securities Shares Depositary Receipts <ul><li>In 2011, Euroclear Bank announced the launch of settlement, custody and related post-trade services for all Brazilian equities and domestic fixed-income securities </li></ul>Euroclear Bridge Single Security Traded <ul><li>Simplified Dual-Listing regime </li></ul><ul><li>Higher Liquidity </li></ul><ul><li>Facilitates access to a growing international investor base </li></ul>Previously– 2 Domestic Listed Securities Recent Innovation – 1 Global Security
  26. 26. NYSE Euronext Russia’s Capital Markets Evolution
  27. 27. Russian Businesses Raised Significant Capital on International Capital Markets both Pre & Post - Financial Crisis 2010 Largest Capital Raisings Liquidity Split – Domestic vs International 2007 Largest Capital Raisings Liquidity Split – Domestic vs International Total Capital Raised at IPO by Russian Businesses since 2004 ($bn) Source: Dealogic, ECM Analytics. Analysis includes Capital Raised at IPOs by Russian Issuers since 2004. Domestic & International Liquidity represent share of total turnover traded on Russian vs International Exchanges since IPO. Domestic Liquidity International Liquidity $7,989m Capital Raised ($m) $7,989m $1,929m $1,40m $955m $952m $2,239m $1,003m $428m $400m $421m Capital Raised ($m)
  28. 28. The Case for Competition! Higher Bid-Ask Spreads A Smaller Trading Community Russian Issuers Dominate Trading Lower Trading Volumes on LSE IOB Value Traded € billion <ul><li>50% of SETS’ Direct Members do not trade on IOB systems </li></ul><ul><li>Russian businesses listing on the London Stock Exchange’s “International Order Book” are offered a second tier market </li></ul>Source: BONY, IOB-Traded Depositary Receipt Trading Value (by issuer’s country-1H’10) Source: NYSE Euronext and LSE web sites; as of December 2010; Order Book monthly trading value Source: NYSE Euronext and LSE web sites; as of June 2010 Source: Bloomberg, 6M Average; Note: Analysis includes companies of €1bn to €4bn mkt cap.
  29. 29. The Right Exchange Partner National regulatory authority for listings UTP Traders/ Investors Issuers / Intermediaries <ul><li>A community of over 1,000 issuers with a total market cap of €3.6tr and daily trading volume of €6.3bn </li></ul><ul><li>A pan-European equity market with a single trading platform and 222 direct members </li></ul><ul><li>Access to leading indices, e.g. AEX 25 and CAC 40 </li></ul>Issuers / Intermediaries Traders/ Investors NYSE Euronext Listing Venues A Diverse Issuer Community Source: NYSE Euronext 1 as of December 31 st 2010 Breakdown by ICB Industry based on market cap 6% 4% 23% 20% 15% 14% 11% 7% 1) Alternext and Marché Libre excluded London UKLA Paris AMF CAC 40 Amsterdam AFM AEX 25 Brussels CBFA BEL 20 Lisbon CMVM PSI 20
  30. 30. NYSE Euronext London Benefits to Russian Businesses <ul><li>Access to a broad investor base comprising UK, Euro-zone, US and international investors </li></ul><ul><li>A secondary market fully accepted by UK, US and international banks with over half the volume executed by London based market participants </li></ul><ul><li>A more liquid and transparent market offering the opportunity to achieve a lower cost of capital </li></ul><ul><li>Trading on NYSE Euronext’s next generation Universal Trading Platform </li></ul><ul><li>A robust and fully electronic clearing and settlement infrastructure </li></ul><ul><li>A familiar listings process with listings approved by the UK Listing Authority </li></ul>