What Next for the London Stock Exchange?

Analysts say a stronger European economic recovery and improved trading conditions could boost the company - but they are concerned about recent customer losses

Gaston F. Ceron 5 September, 2013 | 11:31AM
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Descended from 17th century London coffee house traders, today’s London Stock Exchange (LSE) is a major player among stock exchange operators. After losing out on an earlier deal-making attempt, LSE is betting on two other recent acquisitions, in indexes and clearing, to help fuel growth. We see LSE as poised to remain a competitive force in the continuously evolving exchange industry.

Capital markets are at the heart of LSE's business and this segment recently made up 24% of the company’s total revenue, including net treasury income and adjusted for the LCH. Clearnet stake acquisition. These businesses include cash equities trading in the U.K. and Italy, derivatives and fixed-income trading and company listing fees. We expect that LSE will see further revenue gains in capital markets, helped by a recovering European economy. But the exchange industry remains competitive and we think investors should expect LSE to remain in a pitched battle for market share against rivals such as BATS Chi-X Europe.

Separately, we see net treasury income from LSE's CC&G business - interest earned on cash and securities posted as margin and default funds - as a volatile source of earnings. In recent years, this line had jumped, but now is receding amid anticipated regulatory changes. Our expectation is that growth in this business will be more muted going forward, lessening its chances to lead to sharp upside earnings surprises.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
London Stock Exchange Group PLC7,600.00 GBX-5.99Rating

About Author

Gaston F. Ceron  Gaston F. Ceron is an equity analyst covering financial services companies.