Traditionally, the London Stock Exchange (LSE) has taken a rather detached view of the changes going on around it, as have its sister exchanges, but no longer.
There are seven exchanges recognised by the UK’s Financial Services Authority: the LSE, London International Financial Futures and Options Exchange (Liffe), London Metal Exchange (LME), International Petroleum Exchange (IPE), OM London Exchange (formerly OMLX) and two electronic exchanges, Tradepoint and Coredeal (see box).
Of the physical exchanges, the LSE has been grabbing most of the headlines, some of them for the wrong reasons. The main issues have been ownership and the question of demutualisation, and the forging of alliances, the latter resulting in the controversial proposed merger with the Frankfurt Börse. There is little doubt that during the past 18 months London has felt its pre-eminent position in Europe under threat, not only from the other physical exchanges on the continent, but also from the electronic newcomers. Those radical threats have led to radical reactions, although some question whether they have really been thought through.
What is certain, however, is that the LSE is determined to maintain its position in Europe by using new technology to develop its existing business.
Other exchanges meanwhile are looking to create more niche business. Liffe, for example, has also been the subject of speculation, and has been courted by Euronext.
Of all the exchanges it has probably had the most focused strategy since its corporate restructuring in April 1999. In this highly competitive market, it needed it. Facing challenges from Frankfurt and beyond, the exchange has re-engineered itself into a commercial, for-profit and customer-focused business. By driving forward the automation of its market with the wider distribution of Liffe Connect to 20 of the world’s major financial centres, Liffe today offers customers highly innovative product and trading solutions. With over E360bn transacted on the system every day, more business by value is entrusted to Liffe Connect than to any other electronic exchange.
Again technology is at the forefront of this revolution and the exchange has engaged a range of partners to produce the world’s most flexible and open trading platform. By offering access to the system through a range of networks, the exchange is able to offer customers the attractive tailored trading solutions they want. Liffe is now considered a leader in the new e-commerce and business-to-business markets, carving out new business along the way. A new division of Liffe (Holdings) will offer management and IT consulting services, systems integration, and technology development, design and outsourcing capabilities on a global scale.
Last month the LME issued a consultation paper on proposals to change the exchange from a membership organisation into a shareholding entity. It included within the document a new strategy to develop a screen trading system that will become operational in the second half of this year. The LME proposes to retain its open outcry system of trading (‘ring trading’) and to operate screen trading outside those times.
The other main proposals in the consultation document include reducing the board of the new company from 18 members to 13, and the creation of a separate subsidiary to develop new forms of business, including e-commerce activity. Lord Bagri, chairman of LME, says, “The LME is a vastly successful organisation and leads the world in its field. Its trading volumes continue to grow. Yet it is clear to me and the LME board that it must contemplate significant change if it is to continue to serve industry as it does.”
Why, if the LME is so well placed in the world of exchanges, is it contemplating radical change? The answer lies in the inexorable demand from customers for greater speed, efficiency and economy in undertaking their business, allied to the dramatic advances afforded in these matters by technological change. The LME is well run, and costs are kept under strict control, but that in itself is unlikely to be sufficient to keep the exchange at the forefront of all it does unless it changes proactively.
Not to be left behind, the IPE announced a change in ownership. Richard Ward, chief executive of the exchange, says, “Our members are unanimous in their view of and support for the exchange’s future direction. With the reforms to our decision-making structure and to the corporate governance that demutualisation involves, the IPE will have the flexibility to take up the challenges that today’s rapidly evolving marketplace offers. So far this year, IPE volumes are over a third more than the levels we were seeing this time last year, and with the support of the market users I can see nothing but more success ahead of us.”
Heady stuff, and there was also excitement in May when, for the first time in its history, gas oil futures were traded electronically.

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