As Wyn Jenkins discovers, the exchanges are now determined to look for growth in trading, by reaching out to new clients and listing new products. That is, unless another merger comes along…
“We see many opportunities in the derivatives space. We are seeing growing numbers of members and we are developing to offer them new products.”
That is how Hans-Ole Jochumsen, executive vice-president of transaction services Nordics, sums up Nasdaq OMX’s bullish attitude to the financial derivatives market in the Nordic region.
The exchange’s plan for capitalising on this opportunity? “We have a two-pronged approach: we are investing heavily in our infrastructure; and we are developing our portfolio of products on a step-by-step basis.”
This strategy stems partly from adjustments since the Swedish exchange OMX merged with US powerhouse Nasdaq in February 2008, and partly from the organic competitive nature of the landscape in the region.
Explaining the history and twists and turns of the various deals, mergers and demergers that have taken place in the region, or which affect the region, in recent years is a story in its own right. But the result is that three exchanges now co-exist in the region’s financial derivatives market: Nasdaq OMX, Oslo Børs and EDX London.
Nasdaq OMX owns the stock and derivatives markets of Sweden, Denmark, Finland and the Baltic states, and is the region’s biggest and most diverse exchange.
Oslo Børs, as its name suggests, is the Norwegian stock exchange, and offers Norwegian equity derivatives.
EDX was once a London outpost of OMX; then, under the ownership of London Stock Exchange Group, an amicable partner of the Nordic exchange. But the relationship soured after Nasdaq’s takeover of OMX in February 2008, and ended definitively in December 2009.
That spelt the end of EDX’s prominence in Swedish, Danish and Finnish equity derivatives – but it continues to enjoy a partnership with Oslo Børs, through which it offers Norwegian equity risks to clients through its London hub.
Both Oslo Børs and EDX are bullish about the arrangement they have and its success so far. Not all market participants agree, however. Some say many London-based clients followed Nasdaq OMX and those who stayed with EDX have not always been happy with the arrangement. “If you look at the flow on to the Oslo Børs it was a mistake on their part as well,” says one derivatives professional.
Domination and ambition
Nasdaq OMX is now the dominant force in the region and its leader speaks in these terms. Jochumsen especially stresses the amount of investment the exchange has devoted to its infrastructure. “We have done a huge amount of work on this, all of which should be finished early next year,” he says.
In October 2010, the business launched a new trading system for its Nordic cash and fixed income derivatives markets called Genium Inet. The exchange claims the multi-asset trading and clearing system has an average latency of less than 100 microseconds, with a throughput of over 1m messages a second, making it the fastest trading system in the world. Nasdaq OMX is also offering the technology on a commercial basis to other exchanges around the world.
“It has turned out to be a very speedy system – the best system in the world,” says Jochumsen. “We now need to utilise it more. We are planning to move our commodities business over to it, as well as other asset classes. Having many different products on one system will mean a huge upside for clients on the cost side. We also have a growing number of global clients using the system and we are monitoring this growth.
“Based on our experience from our Nordic cash markets, where Inet was launched earlier this year, we expect increased interest in trading and improved market quality in Nordic derivatives products.”
The second strand of Nasdaq OMX’s infrastructure modernisation programme revolves around its clearing system. Jochumsen says the company is reviewing it to “find the bottlenecks and design it so there are none”. It is also analysing the risk management around its existing model, with a view to finding areas of correlation for customers and offering them greater control.
Clearing improvements
Nasdaq OMX wants to ensure its clearing facilities align with coming EU regulations, including the requirement for a member-financed default fund – something it does not have at the moment. “We need to make this change and we are working on a product that will allow us to do that,” says Jochumsen.
The exchange is seeking approval from the UK Financial Services Authority for its clearing system to recognised as on a par with those used in London. Since its split with EDX London, Jochumsen says the exchange has picked up some 50 new UK-based members and this authorisation would be beneficial to them.
“Since the split we have gained many new members and the volume of trades driven by non-Nordic members has increased from 35% to close to 45% during this time,” he says. “We have made many other small changes to make life easier for our non-Nordic members and this is a priority for us.”
All this investment in its infrastructure is intended to make Nasdaq OMX a slicker and more attractive platform to use. “We have rich functionality but low latency,” says Jochumsen. “We see many opportunities in the derivatives space and these infrastructure changes and system integrations will help us take advantage of those. Many of our members are local and active in all asset classes. They want easy solutions and transparent systems. Then, we believe they will be prepared to trade more.”
Growth targets
But in addition to this more efficient system, Jochumsen also wants to grow by launching new products. The business is targeting two specific sectors.
First, it wants to attract more retail customers by offering easy-to-use trading platforms that allow clients to bet on the movement of a share. “It will be simple, in that they might win $1 per contract,” Jochumsen says. “We have started to promote this. We believe if they engage with something like this it will encourage more retail customers and they might move on to more advanced trading platforms.”
The second area of focus is commodities – an interesting one for the group, as its background, in both the US and Scandinavia, lies in equities and financial derivatives.
Through the many acquisitions it has completed in recent years, Nasdaq OMX already owns Nord Pool, the exchange for Nordic energy and carbon derivatives, now renamed Nasdaq OMX Commodities Europe.
In January 2010, Nasdaq OMX Commodities and Nord Pool Spot – the only part of Nord Pool it did not buy – launched a UK version market called N2EX, specifically to trade physical UK power contracts, at first on a prompt and day-ahead basis.
This put it head to head with the Dutch and Belgian-owned APX-Endex, which operates a full UK power market, and ICE Futures Europe, which offers futures.
A year later, N2EX started offering UK electricity futures, and Nasdaq OMX now wants to extend the scope of that offering by extending its automated clearing service for UK electricity contracts.
N2EX has made a slow start while Europe’s leading energy groups, including E.On and RWE, have been gearing up legally to use its service, but it holds great potential for Nasdaq OMX.
“We are live but it is also early stages for us; the technical side is fine and we are almost ready legally,” Jochumsen says. “We think this market has huge potential; we expect it to develop to the same size as Nord Pool eventually. We have the knowledge thanks to Nord Pool but we have adapted it to suit the local market. It was a natural step for us.”
A focused approach
Nasdaq OMX’s outward-looking approach and willingness to move into new derivatives markets contrast with the style of Oslo Børs – the only Nordic national stock exchange that has so far escaped the grasp of Nasdaq OMX.
For Jesper von Zweigbergk, senior vice-president and head of derivatives at the exchange, the strategy is to stick to what it does best, while making the most of its partnership with EDX in London. Despite criticism of the arrangement by some in the market, he backs the decision and says it has been successful.
“When Nasdaq went its own way, we decided to partner with EDX and that has been a good decision,” says Zweigbergk. “We have a common order book and it is a complete partnership. They act as a distributional channel for us and the majority of our global distribution comes through EDX.”
The two exchanges have had a strategic partnership since 2009, when the old Norex alliance of Nordic exchanges broke down – most of them having been taken over by Nasdaq OMX.
EDX and Oslo Børs have adopted the Sola trading system supplied by TMX Group – a partnership cemented in May 2009 when TMX took a 19.9% stake in EDX. Now, of course, the UK and Canadian groups plan a full scale merger.
The EDX-Oslo pairing offered a range of products including a new suite of FTSE Nordic index derivatives and claimed at the time to offer “the most comprehensive trading venues for Nordic and Russian derivatives”.
The partnership has broadly delivered on this promise for Norwegian and Russian contracts but other Nordic trading never took off, and those contracts have been delisted.
Going Turquoise
Further change is happening now, as LSE merges EDX into Turquoise, a multilateral trading facility it bought at the end of 2009. The move is another step in LSE’s ambition to establish a more comprehensive European equity derivatives business, instead of just Norwegian and Russian contracts.
“The partnership we have with EDX will continue but under a different name,” says Zweigbergk. “There will be some benefits in the form of a different membership looking to explore new markets but there will be no real change and the same technology [Sola] will underpin it.”
But he adds that there are other broader and more strategic benefits. “It is clear that LSE is trying to do more in the derivatives market and, as their partner, we are eager to see what successes they enjoy,” says Zweigbergk. “We would like to see them make an impact.” No one from the LSE was available to comment for this piece.
Yet despite this eagerness to see LSE succeed, Oslo Børs remains relatively conservative in its own ambitions. Zweigbergk admits he does not see the exchange as being pan-Nordic, spanning the region; rather, it is focused on specific derivatives stemming from stocks listed on what is a focused exchange.
“We focus on what we know and we want to attract more listings that fit within our sector expertise, rather than worry about our geographical reach,” Zweigbergk says. “We specialise in sectors such as energy, shopping and sea food and we are the dominant exchange in those sectors in the region. Nasdaq promotes itself as a ‘Nordic’ exchange, while we want to be first choice for Norway.”
Zweigbergk sums up the competitive dynamic by explaining that while Oslo Børs does not compete with most of Nasdaq OMX’s offerings and products, Nasdaq does compete in the areas where Oslo Børs has expertise. “Nasdaq is a full market provider but within our niche – Norwegian exchange-traded equity derivatives – we retain a 99% market share,” he says.
As of February, Oslo Børs offered derivatives on 19 stocks, and on the OBX index.
Enough to go round
Competing or not, Scandinavia remains a healthy market for Oslo Børs and Nasdaq OMX. Zweigbergk says total volumes traded, although some 20% down on pre-recession levels, have been steady over the past two years. He notes that the bigger change applied to the number of contracts being traded, which fell to around 160 from a peak of more than 450 before the collapse of Lehman Brothers.
Over the next 12 months, he anticipates slow but steady growth, partly driven by an expansion of the number of products in the market. “We have seen an explosion in the number of different products being used in some other Scandinavian countries,” he says. “Norway will catch up and that will drive yet more growth again.” Zweigbergk is thinking particularly of exchange-traded funds, whose use has exploded.
This ties in with Jochumsen’s view on traded volumes going forward. He estimates that levels of traded equity derivatives for the Nordic region as a whole have climbed some 4% in the past 12 months.
Not all market participants are so bullish, however. “A general feeling is that exchange-traded derivatives are down,” says Nils-Robert Persson, chairman of Cinnober Financial Technology, a Swedish firm specialising in systems for exchanges and clearing houses. “The reason is difficult to speculate about, but I think there are two reasons. Firstly the exchanges in the region are not focused on derivatives; secondly, the OTC market is more active.”
Uncertain future
Like Jochumsen, Zweigbergk acknowledges that regulations planned in Europe are likely to force exchanges to adjust things like clearing systems. There is great uncertainty about exactly what the regulations will mean. But Zweigbergk believes equity derivatives could be shielded from the worst of the changes and that Oslo Børs is well positioned to adjust quickly.
The other great uncertainty hanging over the market is the merger craze sweeping through the world’s exchanges and what that could mean for the Nordic region. Neither Nasdaq nor Oslo Børs are publicly involved in such negotiations but they watch the situation carefully.
“There are a lot of unanswered questions but I guess when it is over we will see who is standing and what the competitive landscape is like,” says Zweigbergk. “But we are a niche player and we believe we can retain our status, regardless of how big rival exchanges grow. We specialise in a local market with different drivers and are well positioned to maintain our strategy, regardless of others.”
It has been suggested that one possibility for Nasdaq could be to approach the LSE and TMX about a deal that would give them a US presence, while adding Nasdaq OMX’s Nordic derivatives market on to LSE’s plans for a pan-European derivatives platform. Jochumsen declined to comment on any speculation.
Burgundy: a new exchange
Although the Nordic financial derivatives market is dominated by Nasdaq OMX, Oslo Børs and EDX, there are some smaller competitors. A limited number of Finnish equity and index derivatives are traded on Eurex, and some smaller exchanges are moving into the market.
Burgundy, a multilateral trading facility specialising in Nordic securities, received approval in January from Finansinspektionen in Sweden to operate a regulated market as an exchange. One of the consequences of this is that it will be allowed to offer derivatives.
Burgundy expects to list its first derivatives products in the next few months. A spokesman for the exchange said it did not expect to compete with Nasdaq OMX and Oslo Børs but would focus more on retail clients.
“We think there is room for growth in this market,” he said. “We have a specific Nordic focus and within the names we already trade we believe there will be opportunities on the derivatives side.”
Burgundy was formed in June 2009, when it started offering trading in securities listed on Oslo Børs and Nasdaq OMX’s exchanges in Sweden, Finland and Denmark. It also handles securities listed on the Nordic Growth Market and AktieTorget.