The London Stock Exchange (LSE) has cut its prices in response to competition from trading platforms spawned by incoming European financial regulations.
But a four-year £40m technology upgrade completed in June improves transaction speeds sufficiently to recoup the lost revenue by increasing trading volumes, says the LSE.
‘Market competition is only one factor in lowering fees, along with remaining efficient and a wider strategy of volume discounts to attract business,’ said a spokesman.
Huge traders such as the US hedge funds have traditionally not done business on the LSE because it was too slow compared with New York. By boosting speeds, London is hoping to lure major deals, according to IDC analyst Peter Farley.
‘The LSE speeds are now at acceptable levels for the really big market players,’ he said.
‘The improvements will produce massive volume increases so the LSE can cut fees while still increasing revenue.’
By planning technology investment well ahead, London has ensured it has a surplus of capacity for handling greater trading volumes, said Farley.
But LSE is subject to competitive pressures of its own.
The effect of the EU financial markets regulation (Mifid), which comes into force in November, will be to open up the sector, creating more opportunity for independent trading platforms that will compete with the main London bourse.
For example, once Mifid is in place, the Turquoise trading system formed by a consortium of seven leading investment banks will offer low-cost pan-European equities trading.
LSE’s price cuts are partly a pre-emptive strike, said Farley.
‘Alternative platforms such as Turquoise have already done their job to some extent, because they have brought down prices,’ he said.
Though the initial impact of deregulation will be to fragment the market, traditional exchanges’ economies of scale will make them likely to lead to subsequent consolidation.
A spokesman for Turquoise said: ‘Historically the threat of competition has resulted in the LSE reducing charges but because of the massive increase in volume it will not impact on its bottom line.’
