063 Exchange Invest Weekly Podcast 17 September

Transcript

New York exchanges opting for the technology arbitrage. A move away from New Jersey data centers appears imminent while bidding heats up for Borsa Italiana, which is being wrenched illogically from the London Stock Exchange Group.

My name is Patrick L. Young. Welcome to the bourse business Weekly digest. It's the Exchange Invest Weekly Podcast.

In a week of frantic news flow, ladies and gentlemen, just remember, this is a very brief reduction of the key headlines from the weekend market structure All the analysis of the week’s many events and happenings, including a multiplicity of deals we haven't got space for in the podcast today can be found in Exchange Invest. It's a daily subscriber newsletter, the unique guide to the bourse business sent daily to your inbox. More details over at ExchangeInvest.com.

Our top story this week, the New York Stock Exchange and indeed NASDAQ and the other U S exchanges have signaled that they will exit New Jersey iIf the state taxes stock trades, - as we mentioned was proposed some weeks ago. The New York Stock Exchange plans to announce that it will run one of its exchanges from a backup site in Chicago for a week as a demonstration of its readiness to quit higher tax jurisdictions like New Jersey, if they implement their threat to raise a transaction levy. At the nexus of taxation and representation, ladies and gentlemen, a third element is apparent in the digital age, the sheer desperation of overspending analogue administrations, trying haphazardly to balance the books.

Given long term issues facing New Jersey, in any case, in powering its data centers, especially the growth rates of securities trading by NASDAQ, NYSE at all….It any way makes total sense for US markets to consider alternative, sustainable, data centers away from the Tristate area. Are we on the cusp of a hollowing out of the U S East coast trading epicenters? Local legislators can certainly make that come true, at a much faster rate with their increasing desperation to find funding for their overspending.

All the exchange groups are wise to avoid New Jersey as this tax plan is Doubtless only the thin end of the wedge.

Parishioners will muse that the New York Stock Exchange playing a Chicago shuffle card is perhaps the first time we have seen that municipality or indeed Illinois, more broadly, being viewed as a lower tax jurisdictional move for quite some considerable time, particularly parishioners will recall given Terry Duffy facing down a similar threat locally in Chicago on behalf of the CME only a few years back.

Confusing signs out of the European Union this week. Amidst it's the Helter Skelter kerfuffle whereby the European Union still seeks to do anything but negotiate a Brexit deal, in good faith... We've reached the maximum angle of leverage for throwing toys out of the pram. The EU, went the message earlier this week, “will delay Euro Clearing decision on Brexit, divorce threat.” Rather, it seemed within 24 hours that that had been somewhat turned around.

Clearly there is a huge internal political battle within the European Union at the moment between the pragmatic folk who are actually capable of understanding business within the European Commission... And the many people who are more tied to the politics of what is a very acrimonious divorce and the EU, as a spurned spouse, determined to try and destroy the United Kingdom of Great Britain and Northern Ireland from prospering as an independent nation.

It's state of play, of course, made more difficult by the fact that the United Kingdom already, even before they reached the point where they can actually enact such a deal, have a full, comprehensive, free trade agreement signed with Japan! Many others on the way we believe.

Anyway, within 24 hours of the contentious Reuters reports stating that it was all over barring the fat lady making the usual yodeling noises for London's clearing lifeline...

All of a sudden we saw precisely the opposite news coming out of the European Union: clearing extended usage of the UK clearing houses until 2022 for European Union counterparties. Of course, the fact that that actually wards off the Eurozone itself going bankrupt and being unable to access financing is neither here nor there in the weird world of agitprop as practiced by the Brussels empire.

Leaving aside the internal state of (Brussels) war, it's clearly the most sensible option going forward because quite simply the London clearing houses’ monopoly is not going to be broken down because they are a source of multi trading collateral, which as we'll hear later has reached no fewer than 27 global currencies.

In deals. It was, as I mentioned earlier, a very busy week for M&A in the parish. All the deals were in Exchange Invest Daily, the newsletter nobody can afford to be without in capital markets and market structure. For the sake of this podcast, let's look at some edited highlights.

After a lot of pre-deal shuffling and off the record remarks that Italy preferred a Euronext bid as it lined up various Italian institutions on the side of the Euronext empire, the actual money went down and now, all of a sudden, Euronext looks under pressure.

Italy is ready to use its vetting golden powers over strategic assets to ensure the Milan stock exchange Borsa Italiana is not sold to an unacceptable bidder economy. Minister. Roberto Gualtieri mentioned.

However, where that initially seemed to favor Euronext, there may already be a pivot required to Deutsche Boese or SiX, the Swiss Exchange as they have the collateral Euronext lacks.

As Eurnext put out mention of the fact that they had indeed bid, it became apparent that the range of bids seems to be in the region of 3.5 to 4 billion euros. Now 3.5 billion euros is 4 billion US dollars. That's the amount that Euronext were rumored to be bidding. The problem is that at the top, it appears the Swiss exchange has already topped 4.75 U S. Billion dollars. That's the equivalent of 4 billion euros. It causes a lot of contention. It shakes the game up significantly. What does Italy really want from its new exchange owner? And might indeed SiX or even Deutsche Boerse be the most viable way to provide optionality? I can imagine there have been fevered meetings in La Defense this week, as frankly, I don't believe Euronext anticipated a serious SiX bid only weeks after the Swiss closed the deal to buy the Spanish exchange again edging out the Euronext empire.

Moreover by the end of last week before the bids were in, consensus was around a maximum $3.5 billion enterprise value, which I've been making clear for months was always going to be exceeded. And in the first round of bidding, it already has!

Of course the Deutsche Boerse and Swiss Exchange have launched a charm offensive to win the Bourse: a big battle. That is absolutely obvious. However, most significantly, for the first time, having led from the front on this bid, which is a first for Euronext in public bidding...they've usually been the underdog.

I believe Euronext are under duress as values have crept up. As I noted, they would. Even at the top of the first round of bidding, the leverage issue is becoming acute for Euronext at a 4 billion Euro value for Borsa Italiana. It makes a chunky purchase with Euronext worth 6.77 billion euros. Managing to munch up a 4 billion year acquisition is going to be very difficult, even with some Italian collateral on the sidelines. Easy solutions would be unpalatable. For example, if Italian investors provide a lot of capital, how can they not expect more control over the parent company?

That's going to upset the French who have long held the role of puppeteers of governance behind EuroNext Thus, it may make more sense for the strategic Italian investors and the government to switch their backing behind an alternative bid. Frankly, all the bitters have their flaws from a suzerainty point of view. Look through the lens of Rome...And Italy may indeed rue losing the London Stock Exchange Group’s benign hand of governance.

However, the key takeaway to chew on is that Euronext are going to struggle to buy this asset, given that their purchasing power is pretty stretched already as even the 3.5 billion Euro, low bidder. Clearly London Stock Exchange, if they have any nous, will be pushing to get a better price from Deutsche Boerse and the SiX exchange, either of whom have essentially vast resources to push the price up... where Euronext is boxed into a corner.

Meanwhile a stellar day from a new listing, the stock exchange Boursa Kuwait launched itself on its new market, finally, and had an unbelievable jump: 10 times the shares went up on the first day of trading, which is a massive boon for the likes of Hellenic Exchanges, who were amongst the strategic investors last year in the corporate round.

At the same time for the rest of the week, the shares mostly slipped... At the same time, having peaked at 1,055, well, let's put it this way: by the end of the first week's trading. I think it's safe to say that all those who invested in the IPO, the stocks have had, well, at least a 900% return on the week in this position alone!

New markets this week, Egypt have launched their commodity exchange. They're going to have offerings available from early 20, 21.

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Check out our new live stream IPO VID live Tuesdays 6:00 PM. London time, one o'clock lunchtime, New York time. The IPO video live show. You can catch the back episodes on LinkedIn and YouTube: IPO-vid. This week, we enjoyed the presence of the illuminating former Brussels MEP and leading markets expert, Jake Pugh, who stepped into the breach and delivered some fascinating insights ranging through macro economics, politics, exchanges, and much more.

In crypto land this week, the FATF, they're the sort of people who come after you when you've been money laundering, not doing your AML, your KYC, and all those sorts of processes... they've been hinting at. Well, it looks like Bininance as an example of an exchange, avoiding regulation.

Essentially the FATF doesn't seem to like frequent jurisdiction hoppers, and that of course could include Binance. I regularly note in Exchange Invest, the Casablanca conundrum, and many might allege that captain Renault's remarks about ‘gambling in this establishment’ could have qualified him for a role as Binance’s PR chief.

Allegedly at the same time Binance may claim that they are not jurisdiction hoppers as they simply don't ever have a jurisdiction that is clear...even if they do occasionally meet government ministers and donate to various charities related to the heads of state etc.

Elsewhere, crypto exchange Kraken,, they have received a Wyoming bank charter for their new subsidiary in the U S and Diginex, they're moving closer to a backdoor listing through NASDAQ with the approval of a merger transaction.

In products. I mentioned earlier, the expansion of London clearing house. Now there are 27 currencies in the LCH swap pool with the first cleared Israeli Shekel denominated swaps. The European Union can only dream of taking its single currency clearing from that wall of collateral offsets.

Over in India. Exciting news, the reserve bank, the central bank, they're proposing to launch exchange traded on OTC interest rate derivatives that could Mark a very, very exciting move for the Indian yield curve.

[00:14:38] Elsewhere Allegro they've confirmed their debut is coming on the Warsaw Stock Exchange ...looks like an exchange, smells like an exchange is of course, the Polish equivalent of eBay. They've got an estimated market capitalization of 10 to 12 billion euros coming up, which will make it probably the largest issue in history for the GPW and actually the largest eCommerce offering in Europe this year.

Compare and contrast that with the GPW, the Warsaw Stock Exchange itself, which at least partially due to ongoing government control issues, has a market cap somewhat stuck at around 450 million U S Dollars, still below its IPO price of nearly a decade ago.

Technology news this week: Bitstamp, they have integrated their new NASDAQ matching engine in their crypto exchange.

...While the UK’s CREST, that's a Euroclear division, which clears and settles stocks in Europe, has had a week to forget: massive technical outages. and a constant slow down of settlement processes.

The cloud was a big topic of discussion with amongst others NASDAQ ramping up their cloud move for all 28 of the company’s markets being expected to move into the cloud within the next decade.

And indeed as the week ended, we heard from the Astana international Exchange who are also going to be moving their NASDAQ matching engine into Amazon web services in the Cloud.

Regulation news this week, EY the audit firm who've been rather caught with their trousers, down over Wirecard. They're going to ‘raise the bar’ in spotting fraud. After the Wirecard accounting scandal. Given how EY apparently missed a few billion missing in the Wirecard accounts for several years. Presumably that raising the bar involves getting the bar off the floor in the first place, or indeed, perhaps out of a ditch dug by lax accounting, and auditing.

People News this week, a slight surprise: Ellie Mae having been taken over just a week ago, their president and CEO, Jonathan Corr promptly retired, I suppose, partially motivated by the fact that he's been on the tail end of two acquisition deals in two years and therefore, presumably two similar payoffs, which at least motivated him to think about doing something slightly different.

Over at Euronext, congratulations to Aurelie Cohen, who has been appointed chief communications and investor relations officer having joined Euronext Three years ago as head of investor relations. Congratulations too to Peter Jesup who's taking up a key pivotal role in the LSEG technology organization. Not before time, adding a great name to the LSEG's new push into selling to more client exchanges around the world.

In trade finance, a heavyweight of that business, Dominic Broom, who also happens to be a fellow liveryman of the Worshipful Company Of World Traders of which I too am a member: he's moving closer to the parish with his encyclopedic grasp of trade finance, as he takes over as the chief executive of trade finance exchange Fineon.

Ladies and gentlemen, on the good news this week, that CCP 12, they're the super competent body, which oversees the world's clearing houses as an industry body they've welcomed Saudi Arabia's clearing center, Muqassa as a primary member. That of course comes just a fortnight after the successful debut of the Saudi Arabian derivatives market

Elsewhere on a more challenging note...

a story and crypto news this week arose: Will a digital, Chinese Yuan sound the death knell for China's ATMs?.

An interesting side effect of the cashless society.

If this leaves a huge amount of closet sized real estate with holes accessing main street, does that mean ladies and gentlemen? We'll see, during these COVID social distancing times, a widespread re adoption of the old Florentine tradition of buchetta, or wine holes, through which one can dispense drinks in the absence of a public hostelry?

And on that mysterious and magnificent note, ladies and gentlemen, thank you for listening to this the 63rd weekly podcast of the Exchange Investor Newsletter, all the news, all the bourse business news that's fit to pith Monday through Saturday in our daily newsletter of course, have a great week in markets.

My name is Patrick L. Young.

LINKS

NYSE Signals It Will Exit New Jersey If State Taxes Stock Trades

Wall Street Journal

Exchanges To New Jersey: Tax Trades And We'll Move Data Centers

Data Center Knowledge

Trading Powerhouses Join Exchanges In Fighting NJ Tax Plan

Pensions & Investments

NYSE May Move Trading Systems From NJ Over Stock Trade Taxes

New York Post

EXCLUSIVE-EU To Delay Euro Clearing Decision On Brexit Divorce Threat - Source

Reuters