Last month, the financial press devoted considerable column inches to Deutsche Borse's decision to back out of plans to acquire rival exchange Euronext. The German exchange did, however, quietly proceed with a venture for the structured products market by merging its structured products trading with the Swiss Stock Exchange (SWX). The jointly owned subsidiary, known as Alex, will become the first Europe-wide exchange that is devoted purely to structured products.
Alex will begin trading from January 1, 2007. It hopes to quickly establish a foothold in Europe and has set itself the lofty goal of becoming the leading structured product exchange in Europe. Its natural competitors for structured products listing in Europe are Euwax, Borsa Italiana and Euronext.
"Alex's competitive advantage rests on the fact that we are specialised exchange, aiming to more directly address the specific needs of customers in this segment," says Marc Zahn, Zurich-based chief executive of Alex. and formerly head of marketing and sales at SWX. "The advantage of Alex also lies in the aggregated liquidity that will be attracted to this centralised trading venue from all corners of Europe and a large network of participants."
From SWX's perspective, at least, this is a necessary and timely venture. The market for exchange-traded warrants and structured products has grown exponentially in recent years, Zahn says. But the exchange admits the idea to merge came in response to it losing market share to the benefit of competitors in Europe. One of the central reasons behind this trend was that the SWX was not in the position to provide the necessary technical capacity for high-transactions markets, Zahn says. "Urgent investment in our network and our platform, in addition to a programme of second-line measures, was therefore needed to halt and reverse this trend," Zahn adds.
SWX was already in the process of rectifying this trend with the addition of the Quotematch pricing model technology in November last year. "With the introduction of our new platform the number of listings per month nearly doubled," Zahn says. Turnover has also increased, with some issuers returning to listing in Switzerland and with the introduction of innovative new products, Zahn adds. Certainly the number of listings on the SWX has surged in 2006: in the first 10 months 10,366 instruments have been listed on the exchange, up from 6,649 for the whole of 2005.
However, a strong European partner was required in order to achieve wider European success. Enter Deutsche Borse. "We firmly believe that, operating out of strong domestic markets, both partners can work together to generate significantly higher Europe-wide growth potential for this segment than would have been possible alone," Zahn says.
Importantly, for both the Swiss and German exchanges, they remain in their familiar regulatory environments. From these home bases, Alex aims to spread across the continent. "We will work together to tap into the growth potential offered by the European market," Zahn says.
Ultimately, the structured products investor will be the winner from the initiative, Zahn claims. "Alex will increase the competitiveness between exchanges and the investor will profit from this development," he says. In order to achieve efficiency, for investors and issuers alike, Alex will utilise various pricing procedures. Issuers may choose the market model that is best suited to the trading of their structured products. Alex is also planning to implement clearing and settlement structures that will enable cross-border transactions to be conducted at local tariffs.
From the first day of trading, the SWX will spin-off its existing business in warrants and structured products into Alex. "Via Alex, the SWX and Deutsche Borse are combining their clout in a rapidly growing market segment and thereby creating a new market standard not only for the two home markets but also for the rest of Europe," Zahn says.[ST] People - Structured moves.