“In finance, names can be a bit misleading,” intones an American-accented voiceover on a promotional video for the London Stock Exchange Group. “Take ours, for instance,” it continues.
Black cabs driving around London carry adverts showing the company’s logo alongside pictures of the Eiffel Tower and the Statue of Liberty. The video cites the 190 countries in which it operates. The rebranding is clearly intended to show that the London Stock Exchange Group is no longer particularly about London — or about trading stocks.
These days, the group that owns the 300-year-old exchange makes under 4 per cent of its revenues from listing and trading cash equities, a figure dwarfed by the data and analytics businesses it has acquired and developed since 2017, which now account for about two-thirds of its revenues.
“This is no longer a capital markets business in the same way that a Euronext or even a Deutsche Börse is,” says Tom Mills, analyst at Jefferies. “It’s significantly more skewed towards data.”
The $27bn acquisition of Refinitiv in 2019 in particular transformed it into one of the world’s biggest financial data groups. LSEG hopes that deal will entrench it in the plumbing that underpins global capital markets. A new partnership with Microsoft to develop a desktop analytics terminal to potentially rival Bloomberg shows LSEG managers are doubling down on this strategy.
The company has gone further than many of its rivals, but across the world stock exchanges are moving away from their traditional businesses and into areas including data, digital assets and mortgages. They believe such businesses will be more lucrative than the traditional work of listing and trading companies’ shares, and that investors will be prepared to value them more highly.
The number of listed companies in many developed markets has been falling for years, partly because of consolidation and partly because the growth of venture capital and private equity has given companies access to large pools of funding without the regulatory burden of a stock exchange listing.
In the UK, pension funds have increasingly shunned equities in favour of bonds. Those that buy shares are more likely to turn to tech-dominated New York than the domestic market. The British public, once enthused by the privatisation of state-owned companies, has long since lost interest in the stock market, not helped by the comparatively poor returns of the FTSE 100 share index.
The dwindling number of companies listed on London’s stock market, and their falling total worth, has not gone unnoticed among politicians. The chancellor, Jeremy Hunt, acknowledged in his Mansion House speech in July that London lost 44 per cent of its quoted companies between 1997 and 2019.
“A successful economy needs a successful City,” he told attendees, adding that he wanted “the world’s fastest-growing companies to grow and list right here” and make London “the global capital for capital”.
Many in the City are calling for new measures to stem the drift of new and existing listings to other markets, encourage more domestic investment in UK-listed companies and reinvigorate the country’s equity culture. The government has already committed to rolling back some EU rules on prospectuses and investment research.
LSEG has vocally supported London listings and defended its own approach. But the fall in the proportion of its revenue from equity trading from 15 per cent as recently as 2017 to below 3 per cent in the first half of this year has raised questions about whether a company once synonymous with the City is still interested in it.
“They’re really stuck in the middle,” says Niki Beattie, chief executive of advisory firm Market Structure Partners. “They don’t want to let go of [the exchange], they’ve got the special ear of the policymakers because they are the LSE . . . but clearly their motivations aren’t there and their revenues are not being driven by listings.”
A ‘significant shift’
The London Stock Exchange traces its roots back to 1698, when the prices of stocks and commodities were posted in Jonathan’s Coffee House on Change Alley in the City of London. Like most exchanges, it remained member-owned for most of its history.
That changed at the turn of the millennium. As share prices soared during the dotcom boom, exchanges around the world rushed to turn themselves into for-profit companies, often listing their shares on their own markets. London became a listed company in 2001, the same year as Deutsche Börse, owner of the Frankfurt Stock Exchange. Nasdaq demutualised the following year.
The newly privatised bourses embarked on a frenzy of empire-building, buying clearing houses, derivatives exchanges, data businesses — and each other. There have been three attempts to combine LSEG with Deutsche Börse and it was also targeted by New York’s Nasdaq, Sweden’s OM and HKEX, Hong Kong’s exchange group.
LSEG’s acquisition of data group Refinitiv, its biggest such deal, instantly made it too big and complex for any other exchange to contemplate buying — Hong Kong’s failed advance was reliant on persuading the group not to acquire Refinitiv.
It agreed to sell Borsa Italiana, owner of Milan’s stock exchange, in 2020 in order to help secure regulatory clearance for the Refinitiv acquisition, marking a further step away from the equities business.
“In 2018, LSEG was a collection of great assets largely focused on Europe, largely focused in terms of execution, on equities, and an important but relatively niche provider of data and analytics,” says David Schwimmer, who has been chief executive of LSEG since 2018.
“Today, we are a leader in multiple asset classes, including fixed income and foreign exchange, which are the two largest traded asset classes. And we are a leader in data and analytics on a global basis,” he added. “So that’s a significant shift.”
LSEG aims to become a linchpin of such information, selling access to data on foreign exchange, debt and equity markets to customers such as banks and asset managers across the world. Unlike stock trading, which is highly cyclical, LSEG sells data on recurring subscriptions that generate a more reliable income stream.
Other large exchange groups have also diversified away from the trading venue business. Intercontinental Exchange, the owner of the New York Stock Exchange, has muscled into the US mortgage market, snapping up several home loan companies in its bid to become the data backbone of that industry.
“We should try as hard as possible to be the best stock exchange we can be . . . [but] it’s not like ICE is putting all their effort into listings,” remarks a senior figure close to LSEG.
NYSE’s big domestic rival Nasdaq, home to many of the world’s leading technology companies, bought financial software company Adenza for $10.5bn in its biggest-ever deal this summer, as it too expands beyond equities into risk management and data services.
And in Europe, Deutsche Börse recently spent €3.9bn on asset management software company SimCorp. Earlier this month it launched an investment management division, helping fund managers in areas such as portfolio management and reporting.
“We are awash in data,” says a senior executive at a US exchange. “Every one of us is looking at our business and trying to figure that out.”
The push into data has certainly gone down well with investors. When comparing LSEG’s share price against peers in local currencies, it has risen around 125 per cent since January 2018, surpassing the performance of Deutsche Börse and ICE during the same period.
“I think we are going through a re-rating,” says Schwimmer. “The market has historically thought of us as a markets company and is now thinking about us more like an information services company.”
But its stock still trades at a lower multiple of profits than pure-play financial data companies listed in the US, such as FactSet, analytics companies Standard & Poor’s and Moody’s, and index compilers such as MSCI.
“The information services companies do have a higher multiple because of that higher percentage of recurring revenue and the perception of higher growth potential,” says Schwimmer.
Taking on Bloomberg
The undisputed leader in financial market information is privately owned Bloomberg, whose terminals combine news and data with messaging, and are ubiquitous in trading rooms across the world.
Refinitiv’s own Eikon desktop terminal is regarded as clunky and unreliable by comparison. But next year, it will be replaced with Workspace, a new desktop system and the first major product launched since US tech giant Microsoft took a 4 per cent stake in LSEG last year, as part of a 10-year partnership.
That marked the latest alliance between a major technology company and a major exchange group; Google has a similar agreement with Chicago-based CME and Amazon with Nasdaq.
Tech groups are interested in monetising the valuable proprietary data that exchanges generate, while exchanges are attracted to the cloud computing expertise needed to better package and process data.
Bill Borden, corporate vice-president of worldwide financial services at Microsoft, says the partnership “came down to a real common view around LSEG and their assets”, adding that the combination of running a traditional exchange and owning data from Refinitiv “does make them unique” compared with other exchange groups.
Schwimmer promises that Workspace will be “a significant step change” as it will combine the company’s data with Microsoft products including Excel and Teams.
“We provide the strongest data offering in a number of different areas,” he says, adding that combining that with the chat and video functions of Teams along with “building the necessary compliance capabilities that banks and brokers and others need to monitor communications” will be the backbone of the new system.
Mills says Workspace “brings a much more credible alternative to Bloomberg than really anyone’s been able to offer in the past”.
It will also be competitively priced. Ian White, an analyst at Autonomous Research, expects LSEG to charge around $25-26,000 for its desktop product, compared with Bloomberg’s $30,000 per terminal.
Taking on Bloomberg “is a very difficult thing to do, they are a very strong and successful incumbent,” says one LSEG investor. “Hopefully we’re talking about [Workspace] as a much more credible competitor.”
One senior trader says he has seen “a lot of improvements” in recent years. “The approach [LSEG] had with their clients is providing them with useful data to allow us to do pre- and post-trade analysis, which is crucial.”
The company is also exploring combining its data with Microsoft’s generative AI capabilities, which give banks and fund managers access to AI technology without having to put their sensitive data into public models.
“Instead of publicly using OpenAI’s ChatGPT, institutions want to create an environment where they can access and bring in [large language models] into [their] environment and control the data structures around that so you’re not losing your control around data, you’re not training anyone else’s model,” says Borden.
Par for the bourse
At a two-day investor event on November 16 and 17, LSEG will set out more details of its future plans and the higher growth rates it expects to deliver. That growth will be almost entirely driven by data and analytics, through the Microsoft partnership.
“I think of them as a data company,” says another investor. “The bulk of their business model is more aligned to that. You have a data source, or a collection of data sources where you package that up and sell them to customers and become embedded in their work,” the investor adds.
That leaves LSEG performing a delicate balancing act between politicians and industry bodies on one side, pushing it to attract more listings and reinvigorate markets, and the company’s investors on the other, who are relatively unconcerned about the equities side of the business given its small contribution to the whole.
“We should stop looking to the LSE for all the answers,” says Beattie of Market Structure Partners. “Hats off to them, they’re a nice big company now and they’re off doing other things. They’re no longer the answer to all our problems.”
Alasdair Haynes, chief executive of Aquis Exchange, a rival, UK-based venue for smaller companies, echoes her views and criticises the government for devoting so much attention to a company whose focus increasingly lies elsewhere.
“I didn’t realise the chancellor worked for the LSE,” he quips, referring to comments from the UK’s finance minister earlier this year urging global companies to list here, “making LSE not just Europe’s Nasdaq but much more.”
Schwimmer dismisses any notion that listings are now trivial for the business. “LSEG has a key role to play,” he says. “In terms of helping to drive some of the discussion, helping to promote some of the discussion, whether that’s our engagement with market participants, or the regulators or the government or issuers.”
Yet the sense of waning momentum persists. Chip designer Arm, a rare British large tech company, earlier this year chose New York to float, valuing it at $51bn, lured by its larger pool of capital and more tech-savvy investors.
London-based commodity broker Marex and UK pollster YouGov are among the companies considering abandoning their London listings in favour of New York, following in the footsteps of the world’s largest building materials group CRH and packaging company Smurfit Kappa.
Earlier this week, Glencore’s chief executive Gary Nagle said the company would list its planned coal mining spin-off in New York, even though natural resources companies have traditionally been one of London’s strengths. “We believe we would get a better valuation for this business in New York,” he added.
But LSEG’s own promotional campaign, pointing to everything they do beyond listings, the importance of data, and with an American voiceover, marks ambitions that stretch well beyond the UK.
“Our brand name is unfortunate,” says the senior person close to LSEG. “We have a name that everybody associates with something that’s really not what the business is anymore.”
“The political and public perception has to start to adjust to reality a bit more”.