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WFE Focus April 2011
2010 WFE cost and revenue survey by Romain Devai and Grégoire Naacke

The WFE has conducted the annual cost and revenue survey covering 51 WFE member exchanges in 2010. Here are the main results of this annual survey. The full report is available at WFE website.

In 2010, total revenues reached USD 27.5 billion, a still modest increase (+1.9% in constant USD terms) compared to growth rates observed between 2002 and 2008.

Over the last few years, regulated exchanges have been evolving in a very rapidly moving environment and with difficult market conditions, especially on cash markets.

In Europe, the European Commission’s adoption of the Markets in Financial Instruments Directive (MiFID) in 2007 led to an increasing competition from electronic communication networks, dark pools and other alternative trading systems. In the United States, this competition continues to be fiercer and is expected to intensify in the future. New entrants may attract significant levels of cash equity order volume through aggressive pricing.

In that context, most exchanges in those two regions had to reexamine their pricing structures to ensure that their fees remain competitive. In 2010, trading revenues derived from cash markets decreased by 9% in the United States and European Union (they represented 61% of total cash trading revenues worldwide against 64% in 2009).

In the United States, the year 2010 was marked by two regulatory events with a significant impact on the evolution the capital markets environment: the publication by the SEC of a market structure concept and the May 6th “flash crash”. New rules resulting from these events such as the rules concerning halting trading during volatile markets, market access, algorithmic (high frequency) trading, alternative trading systems such as dark pools, and other market structure issues could change the competitive landscape.

Market conditions were also not very favorable for exchanges’ expansion on cash markets in 2010. Global market capitalization was significantly up, but the value of shares traded increased much more slowly (+2.8%), still at a relatively low level compared to the 2008 high, and the decrease in number of trades led to an unexpected rebound in the average value of trade. Trading revenues on cash markets globally decreased by 4% in constant terms.

As far as derivative markets were concerned, market conditions were much more advantageous. Trading in derivatives contracts on regulated exchanges worldwide surged 26% in 2010, the highest growth rate (+41%) being observed in the Asia-Pacific region. Revenues generated from trading and clearing fees for derivative markets increased sharply (+14%) and the two exchanges only active in derivatives, namely Intercontinental Exchange and CME Group, experienced a growth rate of their total revenues above the industry average (respectively, +15% and +16%).

Moreover, in response to the changing regulatory framework following the financial crisis, (Dodd-Franck Act and MiFID review), several exchanges have developed solutions to process and clear OTC contracts. This new environment can be seen as an opportunity for derivative exchanges to attract OTC volumes and to develop new services and products.

Recent years have also been marked by the growing importance of new trading technologies for regulated markets. Following those rapid technology changes, many exchanges focused on improving and developing their electronic trading systems and expanding their low latency trading offerings. IT sales and services increased by 15% in 2010. In the Americas and EAME, the biggest investments seem to have already been made, IT costs decreased by respectively 2% and 7%. At the end of the spectrum, in the Asia Pacific region IT costs increased by 9% in 2010.

Finally, global cost reductions allowed exchanges to improve their profitability for the second consecutive year (net income was up 22% at USD 8.4 billion and average net profit margin was 30% against 26% in 2009). This cost reduction was, at least partially, due to the first positive signs from some recent mergers: NYSE Euronext, London Stock Exchange Group and Deutsche Börse Group (excluding ISE impairment charges and costs of efficiency programs for Deutsche Börse Group) all experienced a significant decrease in their costs in 2010.

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