APCIMS ANNUAL CONFERENCE
"The Next Steps for the London Stock Exchange"
Clara Furse
Chief Executive, London Stock Exchange
Friday 19 October 2001
Good afternoon
I am delighted to have been invited to speak at your annual conference - my first as Chief Executive of the London Stock Exchange.
Strategic Overview of the London Stock Exchange
During the last year, the London Stock Exchange has made good progress - both in building our business and in strengthening relationships with our customers. We aim to continue that progress.
We have completed the transition from a member organisation to become a fully listed commercial company. This allows us the flexibility to pursue our strategic objectives and subjects the company to the disciplines of the market economy. We can now focus more clearly on meeting the needs of our customers and delivering value to shareholders.
As you know we are celebrating the two-hundredth anniversary since the formation of the first regulated market in London with a series of promotional and charitable events;
But, most importantly, we have carried on with our programme of reform of the UK equity market and initiated the internationalisation of our markets.
We now operate in a fiercely competitive environment and must have in place the right people to build on that challenge.
I have therefore strengthened the Exchange's senior management team with several key appointments:
Marc Bailey, our new Director of Business Development, will manage the Broker and Issuer Services groups. Marc's experience at the sharp end of broad product sales and trading will help us to focus more keenly on our customer services initiatives.
Chris Broad and his Broker Services team continue their excellent work of the last year.
David Lester joined us in June as Chief Information Officer - the first in the Exchange's history. He will further develop the Exchange's excellent technology and information services.
Phil Bruce, Head of Corporate Strategy, is assisting Martin Wheatley and me in shaping the future character of the Exchange's business.
Nick Gammage has been Director of Communications since April. I have never underestimated the impact of effective communications with our customers, the media and government. And I believe it is assuming an ever greater importance for the Exchange.
Together, we intend to implement an ambitious strategy in the year ahead.
As you know, we intend to be Europe's leading exchange organisation. We start from a strong base from which to pursue our global ambitions for growth.
That is to say that our ambition begins with equity product.
It is our aim to be Europe's undoubted exchange leader in trading a far broader range of instruments and to exploit the increasing potential for technology sales.
We aim to do this from a position of financial strength. By that, I mean that there is a clear focus on driving revenue up by providing services that customers want - at the right price. And driving costs down by stripping away unnecessary spend.
And I want the London Stock Exchange to be at the forefront of moves to shape the development of capital markets.
An ambitious agenda.
The Way Forward
I intend to implement that strategy in three complementary ways.
First, we can and will strengthen our position through corporate activity. Obviously, I am bound by the Takeover Code from going into any detail on our potential transaction with LIFFE beyond what is already in the public domain, but let me remind you what we said about our strategy at the time of listing.
We said we would be "the leading Exchange organisation in Europe". We said we would shape the development of capital markets through linkages, alliances . through mergers and acquisitions.
We said we would extend our services, broaden our product range . We said we would build reach and scale.
We are doing all of these things. Some of them through the initiatives that I will outline today but it is clear to us that an offer for LIFFE would deliver a number of these and it represents an important step in our wider strategy for rapid growth.
The fact is that we operate a scale business - we know that the Exchange can deliver tremendous value by combining markets through a single trading system a single interface ultimately a single rule book. But this story is one about growth and we are convinced that our proposition to LIFFE will deliver substantial benefits to customers, a compelling growth story and create a new strategic dynamic for both markets, as well as creating value for our shareholders.
Let me also say therefore that we have been enormously encouraged and heartened by the number of customers who have said to us that it is important to them that this deal is delivered.
Second, the Exchange will move ahead with its programme of change in the UK equity market so that we improve products and services to you and grow market share both within Europe and internationally.
And third, we will continue with our efforts to influence the evolution of capital markets by engaging in the many public policy debates which now impact on our industry. For example in the UK we continue to lead the debate on the integration of the European capital market.
Reform of the UK Equity Market
Let me begin with how we plan to improve our products and services within the UK equity market - particularly to the private client broking community.
Listening to APCIMS Members
Since joining the Exchange in February, I've committed the company to developing services which better serve your interests and your needs.
We have consulted with you, through our Private Client Broker Group, regular client meetings and through APCIMS. I have tried to visit as many firms as possible all over the country.
Let me say straight away that I understand the frustration that many of you have expressed at the lack of interaction between the wholesale and retail markets.
I want to change that.
Many of the new products and services I'm about to describe are all about improving retail access to the central market and offering you the same level of service as the wholesale market. And not before time, I would agree.
First, let me just report on the fundamental infrastructure of the UK market.
Investment in the UK Infrastructure
The central market platform is clearly working well and is - in my view - the most robust in Europe.
Despite depressed trading conditions and the general market downturn, trading volumes in equities in September stood at an average of 218,000 bargains per day - an increase of 31% year on year. In fact, Friday 21 September saw record UK volumes passing through our market - 235,000 overall with 146,000 executed on the SETS order book.
Despite well-founded confidence in the Exchange's technical infrastructure, we have embarked upon a 30 million programme of upgrades and improvements to our trading and information systems and networks.
First, the latest upgrade to our trading service will ensure that the London market has the capacity to absorb ever higher volumes, and will also allow other markets - the Johannesburg Stock Exchange being the first - to access the same technology.
Second, we recently appointed WorldCom to help install a high-capacity network that will link the Exchange with our customers using Internet Protocol - or IP - communications technology.
Importantly, the IP network will provide increased capacity, flexibility and reach to the Sequence trading platform.
It will provide the key component of the Exchange's new customer communication service - ExtranexTM - which we intend to roll out from April of next year.
ExtranexTM gives us the capability to introduce services that increase access with the potential to drive down your costs. You can choose to have a single connection to provide you with access to London Stock Exchange trading and information services, the RSP Gateway and CREST.
I would like to explain these different initiatives in a little more detail.
The RSP model works well but more needs to be done to make it even more efficient. Not enough of you enjoy the full benefits of finding the best price available between the full choice of RSPs. So we're going to make connectivity to RSPs a utility and give all of you that choice - free of charge - by introducing the RSP Gateway.
This will provide a new central Exchange service to facilitate electronic trading between brokers and participating RSPs. The service will encourage the entry of new RSPs, increase competition for broker business and allow the industry to benefit from cost savings through infrastructure and efficiency gains.
But not everyone shares this vision. We believe that will change in time. The logic of a single point of access which ultimately connects all brokers and all RSPs and which is, critically, delivered as a utility, is compelling. We hear that many of you here do already share that vision and we can and will deliver it.
You've told us you would like to be able to access the Exchange's systems and CREST with one electronic link so we're introducing our own CREST Network service on the back of the ExtranexTM network. We believe the new service will again offer further choice and reduce message trafficking costs by as much as 40-50%. Our research suggests that it could save the industry as a whole up to 15 million a year if Exchange pricing becomes the norm.
On the subject of SETS:
I appreciate that SETS is for many of you just the price reference point. But we need and wish to ensure that, within the central market, we are continuing to develop and improve the system.
In the last four years, average spreads in the FTSE 100 have been reduced significantly to around 30 basis points. Order book share - by value traded - has increased to 63%. That improved efficiency feeds through to the RSPs and - particularly with the introduction of the new RSP Gateway - to your own businesses.
We will also make the clearing and settlement of SETS trades more efficient. Building on the successful introduction of the central counterparty - with CRESTCo and LCH - we will introduce a netting capability next year. That will result in reduced capital exposure and substantial cost savings. We predict compression rates of 85% or more.
We have heard concerns from a number of you about volatile margin levels within the central counterparty and are working constructively with APCIMS, CRESTCo and LCH to see how margin costs can be reduced.
Increasing Choice of Markets
As well as investing heavily in the infrastructure, we have also increased the markets available to you and your customers.
London's markets now comprise:
1900 UK listed companies - 99% of all UK listed companies
470 international companies from over 60 countries - more than any other stock exchange
Nearly 250 technology companies listed on techMARK and over 600 smaller growth companies on AIM - around 80% of the entire European market in these sectors.
It is interesting to note that just four UK companies out of four hundred that came to the market have chosen to list overseas during the last two years.
That's four too many, of course.
As I've mentioned, this year has been a turbulent and challenging one. In the UK, the IPO market has obviously not kept pace with last year. But we have still had 115 IPOs, 58% of the European total. Compare that with 20 in Germany and 17 in France.
We are continually looking at opportunities to promote existing markets and launch new ones.
techMARK and AIM as you know.
We have invested heavily to extend the reach of our markets and raise their profile across Europe - notably in Frankfurt, Paris and Milan. I have spoken to Israeli companies about the benefits that these markets can offer them; Don Cruickshank visited Japan at the beginning of October and I will be in India next month as part of our programme to attract international companies to London.
We are also opening up techMARK to international companies with a secondary listing. We believe this will raise the profiles of existing techMARK companies overseas and bring greater liquidity to the market as a whole.
In addition, over the next few months we will introduce a number of new initiatives which we believe will help retain London's position as the major technology market in Europe
Building on the success of 'attribute-led' markets such as techMARK, we launched landMARK over the summer. landMARK is internet-based and groups together companies, brokers and advisers into a market with its own identity based on location. Over 150 companies have created two-way links to their landMARK Investor Relations page on our website.
Last year, we launched extraMARKTM, our new products market.
Thirteen exchange-traded funds - the lower cost alternative to unit trusts - now operate under its umbrella.
We are also going to launch a covered warrant market in the UK as a segment of extraMARKTM.
Covered warrants are now eligible for settlement in CREST on a delivery-versus-payment basis. The UK Listing Authority is also developing rules that extend access to such instruments beyond specialist investors to retail private clients. As a result, we believe there will be a strong retail element to the new market - as exists in the United States and in other European countries.
The new market will be launched in the first half of 2002, relying as it does on the information dissemination capabilities of the ExtranexTM system.
As well as internationalising domestic markets, we have also introduced new markets to promote domestic investment in international equity.
Markets such as the International Retail Service.
IRS supports trading in nearly 250 international blue-chips, including nearly 50 US stocks. While the appetite of UK private clients to invest overseas has been dulled by current market conditions, we see IRS as an important initiative in helping to lower the cost of cross-border trading. Settlement is at UK levels for retail brokers, and the domestic information feed will carry these prices at no additional cost.
Over 150 of our members currently subscribe and the service has ensured that the cost of investing in IRS stocks has been reduced by 20 to 25 times.
Promoting High Quality Regulation
One of the reasons - I believe - why the UK equity market has stood up well to the downturn in global markets is the strength of our system of regulation.
Now I know this isn't always the most popular subject to bring up at a conference of brokers, but it's worth mentioning because so many companies and investors we meet overseas cite it as an important reason to do business in London.
The UK is undoubtedly the European leader in such areas as market transparency, corporate governance and disclosure of company information. And unlike some, we don't believe in re-writing the rule book as we go along - particularly in a bear market.
A daily average of 700 announcements are now made by companies through the Regulatory News Service - compare this with the minimal level of activity in the rest of Europe. One of the reasons that quarterly reporting is gaining currency is to compensate for the poor quality of continuing disclosure in other markets.
RNS provides a good example of the investment we're putting in to our regulatory advantage.
We have transformed RNS into a web-based product to improve its accessibility to both companies and investors. In particular, existing and prospective investors do not now need to have information terminals to access corporate information; they can access them directly from the Exchange's website.
We will announce details of pricing and further enhancements to RNS following the FSA's review of news dissemination. We look forward to offering RNS on a commercial basis within the new competitive environment and extending the reach of its service beyond the UK.
One final regulatory issue: the FSA's review of the best execution rule.
Having discussed the issue with a range of market participants, we are not convinced that the case has been made for wholesale change to the current regime.
I would be sceptical of any regulatory approach to this issue that tries to impose on firms such as your own a statutory number of execution venues. It would add unnecessarily to costs - particularly in light of the "utility" approach we are taking to the introduction of the RSP Gateway. It would also be unwise to develop a purely national policy outside of a developing EU framework.
We would advocate - and I believe APCIMS agrees with us on this - the use of a "dealing to a client's best advantage" approach with accompanying guidance. This would be consistent with existing rules and would provide the necessary flexibility to accommodate future UK and European developments.
Given that the FSA has recently been commissioned to pick up Myners issues such as 'soft commission' and 'unbundling', I hope that the they carefully consider the views of market participants before acting.
That is just an over-view of some of the initiatives the London Stock Exchange will be implementing in the coming months in the key areas of infrastructure, markets and regulation.
I believe they will make a positive contribution to increasing the products and services available to you while bearing down on your technical costs.
Promoting the Growth of Capital Markets
Let me conclude my remarks with a few words about two important issues that we need to address in order to change the landscape within which we compete.
I want to stress that on this kind of issue, we place the greatest emphasis on achieving consensus with you, our customers. After all, as the central market serving a wide customer base, we are ideally placed to build coalitions to press for action in the most effective manner possible.
Stamp duty disadvantages UK companies and investors seeking to access capital markets - as well as the London Stock Exchange and APCIMS members.
We have researched this issue thoroughly over the last year, working with a number of organisations - such as The Hundred Group, QCA and the NAPF. There is more than enough evidence to support action on this front. Suffice it to say that the Pre-Budget Report is less than a month away and, rest assured, the Treasury are crystal clear about our views on this subject.
The second issue I want to touch on is the need to move towards electronic share holding.
Despite the fact that around 85% of share trading in the UK is now electronic, no more than 500,000 of the 11 million UK shareholders hold their shares in electronic form. The rest still use paper.
The majority of the UK's European competitors do not suffer these problems. France, Italy and Sweden with much smaller shareholder bases than the UK have already mandated and implemented electronic shareholding. In Germany, almost all shares traded are held electronically as a matter of practice, as is the case in the US.
In response, the UK industry has now generated various possible options while the Exchange itself has taken the lead in offering our own scheme by sponsoring CREST personal membership. We want to encourage others to follow suit but this is likely to require legislation - in other words, it's going to take some time to achieve.
Coupled with the improvements in infrastructure I've outlined, abolition of stamp duty and increasing electronic shareholding would go a long way towards making the UK the most efficient and cost effective market through which to trade in the world.
Conclusion
I hope that I have given you a flavour of our programme of work.
The London Stock Exchange is now a company that takes the initiative in developing our product and service offerings. We listen to our customers but we take a firm view as to the right course of action. And we act on it.
I would like to close with one final point.
I believe that it is vitally important that all the financial organisations in the City of London work together in the next year to promote competitiveness in key areas - electronic shareholding and domestic and cross-border clearing and settlement, for example.
That means close collaboration and discussion.
I look forward to developing that collaboration with you through the APCIMS network, through our Private Client Broker Group and through regular customer meetings. You will have gauged I hope, that the Exchange is invigorated by an ambitious agenda built around a commitment to maximising the value we deliver to our customers and shareholders.
I look forward to updating you on progress with that agenda in the future.
Thank you very much.