August 19, 2013

The Warsaw Stock Exchange and Alasdair Haynes’ new Aquis Exchange became unlikely bedfellows today, as the Polish bourse confirmed plans to take a 30% stake in the pan-European trading platform.

The WSE has agreed to acquire 30% of Aquis’ voting rights for £5 million, according to a statement this morning. Around 60% of the stake is conditional on Aquis obtaining approval from the UK’s Financial Conduct Authority to operate as a multilateral trading facility. Aquis is eyeing an October launch.

The WSE described the cash deal as a “long-term investment”, which will give it a 30% share in Aquis’ future annual profits and two seats on its board.

Haynes said in a statement that the investment “secures our position ahead of our launch”.

At first sight, there appear to be few synergies between a London-based secondary trading platform and what is primarily an eastern European listings exchange. But that is not necessarily a bad thing.

For the WSE, the largest exchange in central and eastern Europe with a 65% market share of trading in the region’s equities, the deal helps it to internationalise and diversify. Along with the opening of its first London office in recent months, it may also help to reduce the political pressure of a touted deal with its regional neighbour the Vienna Stock Exchange. And, cash rich after its IPO in 2010, £5 million is pocket change for the group.

For Aquis, the deal gives it a credible, institutional backer, and a fairly impressive valuation ̶ of just over £16.5million ̶ ahead of its launch. By way of comparison, Chi-X Europe, a successful equities multilateral trading facility set up in 2007, was valued at around £35 million a year after its launch. The WSE must be suitably impressed with Aquis’ model and executive team, its pipeline of clients or its technology ̶ or more likely a combination of all three.

But the investment appears to conflict with Aquis’ long-stated aim of creating a “new and independent exchange”, which would bring “fresh competition” to the current duopoly between incumbent exchanges and Bats Chi-X Europe. By independent, it was always assumed that Aquis, unlike Chi-X and other MTFs, would not be owned by investment banks or other trading firms ̶ and by extension, stock exchanges.

It is important to remember that the original purpose of MTFs, such as Chi-X Europe, was to promote competition with incumbent exchanges and keep a check on their fees. A long-held criticism of Turquoise, an MTF launched by nine investment banks in 2008 but acquired by the London Stock Exchange Group in 2009, is that its ability to truly challenge the LSE is marginalised by that ownership structure.

However, Haynes argues that Aquis’ independence has been maintained: “For us, independence is an important principle and thus having an industry backer of WSE’s caliber, but which is not a client or a competitor, is hugely beneficial,” he said in a statement.

He is right. Competition in the trading of Polish equities does not occur in the same way it does in other European countries, so Aquis and the WSE would not be treading on each other’s toes. But what happens when they do? In the statement this morning, the WSE said “any potential plans of Aquis Exchange concerning operations in the [CEE] region will be settled with WSE”. Make of that what you will.

Nevertheless, the deal shows there is life yet in Europe’s equities markets. With consolidation and cost-cutting an ongoing theme, it is essential competitive forces are kept alive. In the wake of Chi-X Europe’s launch in 2007, it is said that one tier one bank was able to reduce its exchange fees from around £100 million to £10 million. Is there the same level of appetite for to reduce that figure to £8 million? Aquis will soon find out and either way it is likely to be a hard slog.

But as the Chi-X Europe example shows, the rewards are potentially huge. The platform eventually sold to Bats Global Markets in 2011 for $365 million, or around 180 times its earnings.

Aquis declined to comment beyond today’s statement in time for publication. WSE declined to comment further.

Tim Cave