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Page last updated
February 15, 2003




David & Goliath

A look at the comparative performance of the London Stock Exchange& Deutsche Borse in attracting remote members

Hardly a week goes by without Frankfurt’s stock exchange, Deutsche Börse, making it into the financial press. Deutsche Börse (DB) has been marketing itself very strongly, both abroad and at home against the 7 other regional stock exchanges in Germany. Its impressive growth has certainly been something to report. Deutsche Börse’s value of turnover according to the latest figures increased by around 43% compared to around 15% at the London Stock Exchange (LSE). The number of new companies listed at Frankfurt also showed an impressive increase of around 31% as opposed to around 9% for the London Stock Exchange.

A recent article in a Deutsche Börse newsletter detailed its success in attracting remote members. DB has been marketing remote memberships to the major European financial centres, with a special joining offer, since around the beginning of the year under the banner of the joint London-Frankfurt Alliance. They claim a great response to their marketing campaign, with all major European centres now substantially represented. By contrast, the LSE has had a very poor response in signing up remote members in Germany and has yet to turn to the rest of Europe.

With all this as a backdrop the question that many of the City's key players have been asking is, why is Xetra attracting demand when SETS appears to struggle? This question is based on a number of assumptions that require some consideration. The presumption that Xetra is attracting members, that SETS is struggling and that the success of one system is related to the demise of the other are all open to debate.

On the face of things it would seem that the equity market that SETS serves easily outpaces any European competitor. The UK’s market capitalisation is double that of Frankfurt. As a recent report from the Bank of England shows, London's holdings of institutional equities is almost 8 times that of Frankfurt and the London Stock Exchange’s (LSE) global market share of foreign equity turnover on the major world exchanges is 63% compared to Frankfurt's negligible 4%. The David and Goliath proportions of the two markets detract from the direct relationship between the electronic trading gateways that serve them, Xetra and SETS.

The stark comparison of the two markets also deflects from the idea that Xetra passively attracts demand. Events indicate more of an aggressive, well-planned and highly effective marketing campaign to stimulate demand. When considering the degree to which Frankfurt's Deutsche Börse (DB), in comparison to the LSE, has invested resources in PR and direct marketing, planning and strategy and in leading the initiative, the David and Goliath image is turned on its head.

From an initial disadvantaged start DB has not only relied on better marketing to improve its positioning to the LSE and other competitors, but has also invested heavily in building an increasingly attractive market. With innovative developments such as the Neuer Market, the SMAX and support of Eastern European stocks, DB has led the initiative in creating a pro-active and highly responsive market to an increasingly international consumer. The LSE has been much criticised in the press for not following suit.

DB's successes, however, are to a degree independent to the shortcomings of SETS. With regard to signing up new remote members, there is no inherent reason why the LSE should not be met with at least the same welcome as DB has across Europe. Any Italian bank considering remote membership to Frankfurt should be equally interested in the opportunity to do so with London. As mentioned above, the London market is the most attractive in Europe, despite Frankfurt's increasing sophistication. Adapting front and back office systems to Xetra presents no more of a problem than making provisions for SETS. The trial offers proposed by both systems are based on the original London-Frankfurt Alliance and are exactly the same: free workstations, free connections etc. for a year. The only difference is that this is the same offer that DB has been offering for some years under its own merits.

“The LSE has yet to learn that the tricks of the Avon Lady went out years ago”.

The underlying reasons for the proverbial Italian bank to have adopted Xetra and not SETS are two-fold. Firstly, the Italian bank has not adopted SETS simply because it has not been invited to do so yet. Whilst DB has sought remote memberships from other countries from the outset of the Alliance, and even before as an on-going concern, the LSE is only now planning to trek across Europe selling its wares. Furthermore, its door-to-door selling is unlikely to meet with much greater success than in Germany, as it is largely adopting the same marketing approach. No refinement of the campaign is intended, just a case of drawing up a list of the top 10 institutions per country not already represented in London and knocking on their doors. The LSE has yet to learn that the tricks of the Avon Lady went out years ago.

Another reason for the LSE's low adoption rate compared to DB is that in the absence of being asked by the LSE, DB's propositions are extremely appealing. It is a fact that the main German equity market is not as attractive as the London one. It also a fact that the LSE is proving slow in opening its market to anyone not able to represent themselves directly in London.

The solution? Join DB, access the German market and indirectly through the Alliance channel also the London market, not to mention a growing pool of other international markets. No wonder that a link to America has been a top priority for DB. When DB finally achieves access for its 'international' members to the New York Stock Exchange then the game will be over, before the LSE even realised that the game was being played across the channel, and indeed across any national boundary.

In fairness to the LSE, not all the circumstances leading to its performance have been within its control. Some of the circumstances are due to forces beyond its reach, both political and historical. Not being in the Euro-zone is an obvious disadvantage to the LSE in attracting continental remote members; it proposes a further hurdle that the LSE could do well without. Furthermore, unlike most continental financial infrastructures that are highly centralised and consolidated, the LSE is only one element of the fractionized UK infrastructure. Joining DB, in comparison, offers one point of access to a variety of financial instruments and the necessary clearing and settlement services too. Frankfurt is also showing itself as the growing contender to London’s privileged position in Europe’s financial axis. Such institutions as the ECB being located there and the success at drawing the bund market away from LIFFE help to de-mystify London and attract international eyes to the young pretender. It should also be borne in mind that the LSE started off in the dominant position in comparison to DB. The LSE might argue that it simply doesnít have the same room to grow. Furthermore, some of the types of new members that have been signing up with DBC at such a fast rate may not be doing so with the LSE because they already feel sufficiently represented there via London subsidiaries.

In conclusion, the picture is not so much one of Xetra attracting demand when SETS appears to struggle, but more of DB aggressively succeeding in its international bid and the LSE independently plodding along, more interested in farming its domestic market. Ultimately, the question is one of liquidity and not directly how many new remote members each exchange can attract. Liquidity is increasingly international, as are listings. DB’s success and the LSE's struggle are ones of long-term international outlook. DB is having to grow from a position of weakness - it is the market challenger. International growth is its only chance of survival and eventually it is likely to be its competitive salvation. The market leader and cash cow is the LSE and although recent developments such as its plans to become a private entity may be a sign of change, unless it wakes up soon and looks above the domestic grass it is in danger of not seeing the hungry predator in the neighbouring field in time.

Tom Schmittzehe

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