Customers fume as exchanges boom

DEEP in the small print of last week's profit statement from Deutsche Bourse, the organisation that owns and runs the Frankfurt exchanges, was the overlooked gem that the turnover on its half-owned Eurex derivatives exchange had risen to e103m (£72m) from e79m while costs had been reduced a shade.

The result was that Eurex made e50m of earnings before interest and tax on turnover of a little over e100m. That's what you call a profit margin.

Good luck to them, you might say - but not if you are one of their hard-pressed customers, who freely admit that profits made at their expense get up their noses.

It has been a feature of the recession in financial services, now in its third year, that Europe's securities exchanges have fared much better than their major customers, the brokers and investment banks.

Tactless or not, the service providers' profits have soared while the customers have suffered - which is not something that used to happen when exchanges were owned by their members and run vaguely to maximise the ill-defined collective good. Inevitably, because it is the centre for international securities trading, customers in London are more sensitive to this issue than most.

The pursuit of profit is a significant climate change - indicative of a major upheaval in the relationships between exchanges and those who use them. Wherever you look across the Continent - in London or Stockholm, Paris or Frankfurt - the recently privatised exchanges are flexing their muscles to boost their profits.

Adding to the customers' irritation is the fact that the desire to put up prices is not always matched by a willingness to improve the transparency of charging, nor even to enter into detailed consultation with customers in advance.

Not all should be tarred with this brush, however. The London Stock Exchange sets the standard for simplicity and transparency in this area although even it stands accused of upping prices this year to protect its profits - precisely what it worries that London Clearing House might do to it when LCH merges with France's Clearnet and comes under the wing of Euronext. Be that as it may, LSE posts its tariffs on a single page on its website. Borsa Italia's charging schedule runs to 27 pages.

The nub of the problem, however, is that there is precious little the customers can do about charges. With very few exceptions, mainly the result of crass stupidity by the incumbent or a host government, liquidity has not moved between competing exchanges. They hold the business they have but their efforts to grab a slice of another's cake have tended to fail.

The natural constraint on overpricing would be the undermining of local monopoly by the development of real international competition between the different trading platforms.

But it is not here yet because the system is still too cluttered by other costs. To buy a multinational company's shares in Frankfurt rather than London, for example, also involves changing clearing and settlement arrangements and adds to the overall level of charges.

We are not there yet but what is needed is for all the exchanges to have, or at least to offer, common clearing and settlement arrangements. Take the back office out of the cost equation and genuine competition between exchanges becomes a possibility.

That is why what is happening in Holland is so interesting - if that is not an oxymoron. The Amsterdam exchange is part of Euronext but prices to the Dutch broking community are due to go up sharply when their two-year introductory offer runs out, so in an unprecedented move they have asked Frankfurt and London to pitch for their business.

Frankfurt's offer would involve using the German in-house silo for clearing and settlement, which leaves the open architecture of the London proposal initially looking more competitive. Even so, given the unprecedented nature of the change, LSE may need to sweeten its deal to allow the Dutch to continue to clear through Euronext subsidiary Clearnet, to reduce transition costs to a level that makes the switch worthwhile.

If it does happen, it would be a watershed deal. Just think - European brokers seeking out and using the exchange that provides the best customer service at the most reasonable cost, regardless of the country in which it is located. It sounds like genuine competition and that for many in the business, will come as a shock.