2010 COST AND REVENUE SURVEY

Transcription

1 COST AND REVENUE SURVEY Romain Devai & Grégoire Naacke World Federation of Exchanges November 2011

2 WFE Members (as of December ) Amman Stock Exchange Athens Exchange Australian Securities Exchange Bermuda Stock Exchange BM&FBOVESPA BME Spanish Exchanges Bolsa de Comercio de Buenos Aires Bolsa de Comercio de Santiago Bolsa de Valores de Colombia Bolsa de Valores de Lima Bolsa Mexicana de Valores Bombay Stock Exchange Bourse de Casablanca Bourse de Luxembourg Bursa Malaysia Chicago Board Options Exchange CME Group Colombo Stock Exchange Cyprus Stock Exchange Deutsche Börse The Egyptian Exchange Hong Kong Exchanges and Clearing Indonesia Stock Exchange IntercontinentalExchange International Securities Exchange Irish Stock Exchange Istanbul Stock Exchange Johannesburg Stock Exchanges Korea Exchange London Stock Exchange Group Malta Stock Exchange Moscow Interbank Currency Exchange NASDAQ OMX Group National Stock Exchange of India NYSE Euronext Osaka Securities Exchange Oslo Børs Philippine Stock Exchange Saudi Stock Exchange (Tadawul) Shanghai Stock Exchange Shenzhen Stock Exchange Singapore Exchange SIX Swiss Exchange Stock Exchange of Mauritius Stock Exchange of Tehran Stock Exchange of Thailand Taiwan Stock Exchange Tel-Aviv Stock Exchange TMX Group Inc. Tokyo Stock Exchange Group Warsaw Stock Exchange Wiener Börse Every effort has been made to ensure that the information in this Survey is accurate at the time of printing, but the Secretariat cannot accept responsibility for errors or omissions. 2 World Federation of Exchanges Cost & Revenue Survey November 2011

3 Contents 1. INTRODUCTION OVERVIEW OF WFE MEMBERSHIP For-profit exchanges Products Post-trade integration Distribution of exchanges by region Distribution of responding exchanges by legal groups Distribution of exchanges by World Bank income categories FINANCIAL PERFORMANCE General remarks on the figures General performance Equity capital Net income Profit margin Return on Equity (ROE) Price Earnings Ratios REVENUES Total revenues breakdown Details on trading revenues Details on service revenues Details on listing revenues COSTS Costs breakdown by region Salaries and benefits ANNEX 1: FURTHER INFORMATION ON RESPONDING MEMBERS ANNEX 2: DEFINITION AND COMPOSITION OF MEMBERS GROUPS World Federation of Exchanges Cost & Revenue Survey November

4 Summary Member Exchanges Financial figures and market indicators (2005 ) Financial figures (USD billion) /09 /09 % change const. USD Total revenues % 1.9% Total costs % -4.2% Net income % 19.9% Equity % 4.4% Net profit margin (1) 18% 23% 28% 39% 21% 26% 31% 18.7% - ROE (2) 11% 16% 21% 24% 9% 10% 11% 13.2% - (1) Net income / Total revenues (2) Net income / Equity Equity market indicators (USD billion) /009 % change Market capitalization % Share trading volume (EOB) % Performance (WFE global average index) 15.0% 10.0% 23.8% 18.3% -41.9% 44.9% 11.0% - Number of listed companies % derivatives market indicators (million contracts) /09 % change Options % Futures % Total % 4 World Federation of Exchanges Cost & Revenue Survey November 2011

5 Cost and Revenue Key Conclusions Total revenues reached USD 27.4 bn, a still modest increase (+1.8% in constant USD terms) compared to growth rates observed between 2002 and Profitability increased for the second consecutive year: - Net income was up 22% at USD 8.4 billion - Average net profit margin was 30% (against 26% in 2009) Globally, members continued to improve their net income in after the record losses experienced in 2008, when some exchanges posted major impairment charges. Average PER for listed exchanges was down 16% to % of members are for-profit, and 45% are publicly listed. Two exchanges were newly listed in. Trading revenues from cash markets remained the top contributor to revenues (36%), despite the sharp increase of trading and clearing fees from derivatives (+14%) Over the last few years, regulated exchanges have been evolving in a very rapidly moving environment and with difficult market conditions, especially on cash markets. In Europe, the European Commission s adoption of the Markets in Financial Instruments Directive (MiFID) in 2007 led to an increasing competition from electronic communication networks, dark pools and other alternative trading systems. In the United States, this competition continues to be fiercer and is expected to intensify in the future. New entrants may attract significant levels of cash equity order volume through aggressive pricing. In that context, most exchanges in those two regions had to reexamine their pricing structures to ensure that their fees remain competitive. In, trading revenues derived from cash markets decreased by 9% in the United States and European Union (they represented 61% of total cash trading revenues worldwide against 64% in 2009). In the United States, the year was marked by two regulatory events with a significant impact on the evolution the capital markets environment: the publication by the SEC of a market structure concept World Federation of Exchanges Cost & Revenue Survey November

6 and the May 6th flash crash. New rules resulting from these events such as the rules concerning halting trading during volatile markets, market access, algorithmic (high frequency) trading, alternative trading systems such as dark pools, and other market structure issues could change the competitive landscape. Market conditions were also not very favorable for exchanges expansion on cash markets in. Global market capitalization was significantly up, but the value of shares traded increased much more slowly (+2.8%), still at a relatively low level compared to the 2008 high, and the decrease in number of trades led to an unexpected rebound in the average value of trade. Trading revenues on cash markets globally decreased by 4% in constant terms. As far as derivative markets were concerned, market conditions were much more advantageous. Trading in derivatives contracts on regulated exchanges worldwide surged 26% in, the highest growth rate (+41%) being observed in the Asia-Pacific region. Revenues generated from trading and clearing fees for derivative markets increased sharply (+14%) and the two exchanges only active in derivatives, namely Intercontinental Exchange and CME Group, experienced a growth rate of their total revenues above the industry average (respectively, +15% and +16%). Moreover, in response to the changing regulatory framework following the financial crisis, (Dodd-Franck Act and MiFID review), several exchanges have developed solutions to process and clear OTC contracts. This new environment can be seen as an opportunity for derivative exchanges to attract OTC volumes and to develop new services and products. Recent years have also been marked by the growing importance of new trading technologies for regulated markets. Following those rapid technology changes, many exchanges focused on improving and developing their electronic trading systems and expanding their low latency trading offerings. IT sales and services increased by 15% in. In the Americas and EAME, the biggest investments seem to have already been made, IT costs decreased by respectively 2% and 7%. At the en of the spectrum, in the Asia Pacific region IT costs increased by 9% in. Finally, global cost reductions allowed exchanges to improve their profitability for the second consecutive year. This reduction was, at least partially, due to the first positive signs from some recent mergers: NYSE Euronext, London Stock Exchange Group and Deutsche Börse Group (excluding ISE impairment charges and costs of efficiency programmes for Deutsche Börse Group) all experienced a significant decrease in their costs in. 6 World Federation of Exchanges Cost & Revenue Survey November 2011

7 1. Introduction General remarks Attention should be paid to the relative difficulty of comparing financial figures among exchanges at any one point of time, and also over a period of several years. Financial reporting standards differ from market to market, with many members using IFRS while others follow national GAAP standards. Although most members fiscal year is based on the civil year, some are not; and several reported figures covering only part of. When this occurred, they gave full 12 months information up to that reporting date. This survey is based on the responses of 51 Federation members. This is a small population and highky diverse one in terms of scale and business offer. Amman Stock Exchange Athens Exchange Australian Securities Exchange BM&FBOVESPA BME Spanish Exchanges Bolsa de Comercio de Buenos Aires Bolsa de Comercio de Santiago Bolsa de Valores de Colombia Bolsa Mexicana de Valores Bombay Stock Exchange Bourse de Casablanca Bourse de Luxembourg Budapest Stock Exchange Bursa Malaysia Chicago Board Options Exchange CME Group Colombo Stock Exchange Cyprus Stock Exchange Deutsche Börse The Egyptian Exchange Hong Kong Exchanges and Clearing Indonesia Stock Exchange IntercontinentalExchange International Securities Exchange Irish Stock Exchange Istanbul Stock Exchange Johannesburg Stock Exchanges Korea Exchange London Stock Exchange Group Malta Stock Exchange Moscow Interbank Currency Exchange NASDAQ OMX Group National Stock Exchange of India NYSE Euronext Osaka Securities Exchange Oslo Børs Philippine Stock Exchange Saudi Stock Exchange (Tadawul) Shanghai Stock Exchange Shenzhen Stock Exchange Singapore Exchange SIX Swiss Exchange Stock Exchange of Mauritius Stock Exchange of Tehran Stock Exchange of Thailand Taiwan Stock Exchange Tel-Aviv Stock Exchange TMX Group Inc. Tokyo Stock Exchange Group Warsaw Stock Exchange Wiener Börse When information was missing, the Secretariat checked members annual reports and financial statements, in order to include as many data as possible, when available. World Federation of Exchanges Cost & Revenue Survey November

8 2. Overview of WFE Membership For-profit exchanges 41 members were for-profit entities in Not for-profit 18% WFE members in For-profit 82% 82% of responding exchanges operated on a for-profit basis in. Ten years ago, they were 62% of this population. This evolution tends to have contributed to a more intense competitive environment. The profit status changed in for one member compared to 2009: Warsaw Stock Exchange, which went public in. There is one new member compared to 2009: Bourse de Casablanca, which also operated on a for-profit basis. 1 The lists of members by legal status, high/low income and top 10 markets are provided in Annex 1. 8 World Federation of Exchanges Cost & Revenue Survey November 2011

9 2.1.1 Distribution by geography The global membership is quite balanced regionally (see 2.4). In terms of breakdown between for-profit and not for-profit, the Asia-Pacific region has the highest proportion of not-for-profit exchanges (31%). For-profit / not for-profit members by region in 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Americas Asia Pacific EAME Not for-profit For-profit Distribution by market size and total revenues The list of top 10 exchanges in terms of revenues has not changed compared to 2009, only the order has evolved. Among these top 10 exchanges by revenues, eight are running as for-profit entities, the two not-for-profit being those in Shanghai and Shenzhen Distribution by economic development In high-income countries, only one country operated on a not-for-profit basis in, namely the Cyprus Stock Exchange. In low-middle income economies, for-profit exchanges represented the large majority (65%). World Federation of Exchanges Cost & Revenue Survey November

10 2.2 Products 60% of WFE members offer trading in cash equities, bonds and derivatives Caution in interpreting results must be used, as some members offer market operations for several asset classes, but derive the vast majority of their revenues from only one. These results are, however, a good indication that WFE members tend more and more to offer a wide range of products compared to past years when more exchanges were mono-product. In, 60% of the members were offering trading in all products compared to 50% in The 10% increase is due to - two exchanges that started trading derivatives and bonds in (Bombay Stock Exchange and Bolsa de Comercio de Santiago) - three exchanges that started trading bonds (Australian Securities Exchange, Bolsa Mexicana de Valores and NASDAQ OMX Group) - and one exchange that was newly offering derivatives (Indonesia Stock Exchange). In 2009, six exchanges were only trading cash equities. Only one exchange remained in this category in, namely Philippine Stock Exchange. Cash equities, derivatives 8% Derivatives only 4% Cash equities only 2% Cash equities, bonds 26% WFE members by products in Cash equities, bonds, derivatives 60% 10 World Federation of Exchanges Cost & Revenue Survey November 2011

11 In order to simplify, and because revenues derived from bonds are marginal in the case of most WFE members, the following presentation will be used. The percentage of cash equities-only exchanges decreased significantly in (28% against 35% in 2009). Among the 17 exchanges that were not active in derivative markets in 2009, 4 started trading derivatives in : Bombay Stock Exchange, Bolsa de Comercio de Santiago, Indonesia Stock Exchange and Stock Exchange of Tehran. Cash equities only 28% Derivatives only 4% WFE members by products in Cash equities and derivatives 68% The highest proportion of exchanges not active in derivative trading is observed in the Africa Middle East region. Among the14 exchanges not active in derivative markets, 6 are located in this region and 5 in Europe. In terms of legal status, only one exchange out of the 22 listed exchanges doesn t offer derivatives: the Philippine Stock Exchange. World Federation of Exchanges Cost & Revenue Survey November

12 Among the top 10 exchanges by revenues, one change occurred in, Nasdaq OMX started trading bonds. Derivatives only 2 Exchanges Cash equities only 1 Exchange Products of the top 10 revenues by revenues Cash equities and derivatives 7 Exchanges 12 World Federation of Exchanges Cost & Revenue Survey November 2011

13 2.3 Post-trade integration As noted last year, the vast majority, almost 75% of WFE members, offer post-trade services 1. One member started offering post-trade services in, namely Bolsa Mexicana de Valores. Not active 26% WFE members active in post-trade in Active 74% Most of the members that are not active in post-trade are located in the EAME region (9 out of 13). When focusing on the top 10 exchanges in terms of revenues, as in 2009, two exchanges declared being not active in post-trade: Shanghai Stock Exchange and Shenzhen Stock Exchange. But, those two Chinese exchanges jointly own the China Securities Depository and Clearing Corporation (SD&C) but it is an independent entity and the revenues from SD&C are not consolidated. Given the size of the two Chinese exchanges (72% of the revenues of exchanges without post-trade services), the various breakdowns by post-trading integration have to be interpreted with lot of caution. 1 The question was formulated broadly, in order to have a sense of the proportion of members active in post-trade. The active category aggregates very diverse situations, from exchanges only providing for clearing to those active in clearing, settlement, and also depositary services. World Federation of Exchanges Cost & Revenue Survey November

14 2.4 Distribution of exchanges by region As mentioned in the previous surveys, the regional breakdown is less and less meaningful when looking at financial figures, because of the international consolidation that has been taking place. Americas 22% EAME 46% WFE members by region in Asia Pacific 32% WFE members by legal status - 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Americas Asia Pacific EAME Listed Demutualized Private Association Other 14 World Federation of Exchanges Cost & Revenue Survey November 2011

15 2.5 Distribution of responding exchanges by legal groups Listed exchanges represent 44% of membership Other 18% Association 6% WFE members by legal statuts in Listed 44% Private 14% Demutualized 18% Two exchanges were newly listed in : CBOE and Warsaw Stock Exchange. WFE members by legal status - 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% No post trading Post trading Listed Demutualized Private Association Other World Federation of Exchanges Cost & Revenue Survey November

16 2.6 Distribution of exchanges by World Bank income categories In this breakdown, WFE uses the World Bank country classifications, and makes use of two groups: high and low-middle income countries. Low 46% WFE members by World Bank country classification of income levels in High 54% 16 World Federation of Exchanges Cost & Revenue Survey November 2011

17 3. Financial performance General remarks on the figures The presentation of the general performance (gross revenues and cost figures) for will be reviewed according to different categories. Members data were aggregated according to the following categories: Profit objective Legal status : 1. Private, limited companies 2. Demutualized 3. Publicly listed exchanges 4. Associations or mutuals 5. Other legal status The definitions of these legal categories are explained in the annex 1. Regions : 1. The Americas 2. Europe/Africa/Middle East (EAME) 3. Asia-Pacific Size (top 10 exchanges by market capitalization, top 10 by trading volume, top 10 by revenues) Post-trade integration (active/not active) Products offered (cash markets only, cash and derivative markets) Economic development (following the World Bank country classification) The reader should bear in mind that the percentages observed when grouping members in these ways are quite constant when looking at other figures beyond the two revenue and cost indicators. The survey will therefore only emphasize and focus on specific breakdowns where figures were especially noteworthy, or when there were important divergences from the mean. 1 All financial and market figures are indicated in USD terms. World Federation of Exchanges Cost & Revenue Survey November

18 3.2 General performance Revenues were up 2.9% at USD 27.5 bn Costs were down 3.7% at USD 14.3 bn Total revenues in increased faster (+2.9%) than in 2009 (+1.9%) and reached USD 27.4 billion. Nevertheless this growth rate remains modest compared to the stronger growth trend observed before This growth was mainly driven by the success of derivatives in (+26%) after a year with stable volumes in Among the biggest exchanges by revenues: CME Group and IntercontinentalExchange which are only active in derivative markets increased their revenues by, respectively, 15% and 16%; NYSE Euronext and Nasdaq OMX revenues from derivatives increased by, respectively, 16% and 58%, but those important growth were offset by decreases of trading revenues in cash markets (-4% for NYSE Euronext and -20% for Nasdaq OMX 1 ) leading to a total negative growth rate of revenues for those enterprises. For the first time since 2006, overall costs decreased in (-3.7% in USD and -4.2% in constant USD). This decrease is, at least partially, due to the first positive signs from some recent mergers: NYSE Euronext costs decreased by 16% following, among others, an 83% decrease of merger expenses and exit costs ; London Stock Exchange Group also experienced a significant decrease of its costs (-10% in GBP) and Deutsche Börse Group costs decreased by 8% excluding ISE impairment charges and costs of efficiency programmes 2 (the costs of efficiency programmes and impairement charge on ISE s intangible assets amounted to respectively 111 million EUR and 453 million EUR in ). CME Group and BM&FBovespa continued to experience significant growth of their costs (respectively +15% and +11% in local currency) in line with the important growth of their revenues (respectively +15% and +25% in local currency). 1 Extract from Nasdaq OMX Group annual report: In recent years, trading volumes across our markets have fluctuated significantly depending on market conditions and other factors beyond our control. Current initiatives being considered by regulators and governments, such as restrictions on high frequency trading, could have a material adverse effect on overall trading volumes. Because a significant percentage of our revenues is tied directly to the volume of securities traded on our markets, it is likely that a general decline in trading volumes would lower revenues and may adversely affect our operating results if we are unable to offset falling volumes through our pricing. Declines in trading volumes may also impact our market share or pricing structures and adversely affect our business and financial condition. Our matched market share in NASDAQ-listed securities executed on NASDAQ declined from 46.1% in 2007 to 28.6% in and our combined matched market share in all U.S.-listed securities executed on all of our platforms declined from 29.1% in 2007 to 22.2% in. In addition, as a result of the adoption of MiFID, a number of MTFs have launched, thereby significantly increasing competition in Europe. As a result, our matched market share in securities listed on our exchanges comprising NASDAQ OMX Nordic and NASDAQ OMX Baltic has declined from 100% in 2007 to 75% in. 2 Extract from Deutsche Börse annual report: To prepare Deutsche Börse Group for structural change in the financial markets and for the new customer requirements, The Executive Board adopts measures to optimise processes and costs structures. These include reassigning operating functions within the Group s locations, further harmonising the IT infrastructure, trimming down its management structure and strengthening the focus on the Company s core activities. The measure will lead to savings totalling around 150 million a year from 2013 onwards. 18 World Federation of Exchanges Cost & Revenue Survey November 2011

19 2004- Revenues & costs Total revenues Total costs World Federation of Exchanges Cost & Revenue Survey November

20 3.2.1 Review by profit objective Contrary to last year, where not-for-profit exchanges increased their revenues much more significantly than for-profit exchanges, in, the two groups of exchanges experienced growth of their revenues (+3% for for-profit exchanges and +2% for not for-profit exchanges) essentially identical. Again, it should be noted that the not for-profit exchanges only represent 7% of total industry costs against 10% of total revenues, which can be explained by the historic lower cost structure of exchanges located in low-middle income countries 1. Not for-profit 10% Not for-profit 7% Total revenues breakdown Total costs breakdown For-profit 90% For-profit 93% This discrepancy between revenues and costs results quite logically in not for-profit exchanges accounting for 16% of total net income. Not for-profit 16% Total net income breakdown For-profit 84% 1 Most not for-profit exchanges (eight out of nine, and a larger proportion when looking at revenues share within the group) are located located in low-middle income countries. 20 World Federation of Exchanges Cost & Revenue Survey November 2011

21 3.2.2 Review by legal status All the groups but Other category experienced revenue growth in, but those growth remained relatively low. The highest growth rate (+10%) was observed for demutualized exchanges, followed by privates ones (+6%), listed (+3%) and associations (+2%). The very good relative performance of the demutualized group can be explained by its Asian bias 1. The largest exchanges of that group are located in the Asia-Pacifc time zone, which has exhibited a remarkable dynamism in terms of turnover value these past few years. In, revenues decreased (-2%) for other demutualized exchanges that are located in EAME time zone. It should be noted again that exchanges in Shanghai and Shenzhen are largely driving the association results, and they experienced very contrasted results in. In other groups, very different situations are also observed. For instance, within the listed exchanges, Athens Exchange revenues in local currency were down 22%, while Bolsa de Comercio de Santiago revenues rose by 50% Revenues breakdown by legal status (USD billion) 25 +3% % +10% +6% -8% 0 Association Demutualized Listed Private Other In the Demutualized group, exchanges from Asia-Pacific region were representing 90% of the revenues in. The four remaining exchanges (10% of the revenues) are located in EAME time zone. World Federation of Exchanges Cost & Revenue Survey November

22 The distribution of costs and revenues among each legal status reflects the weight of listed exchanges, which accounted for 79% of revenues (to be compared with 44% of the membership). Other 3% Private 3% Total revenues breakdown Demutualized 7% Association 8% Other 4% Demutualized Private 3% 8% Association 5% Total costs breakdown Listed 79% Listed 80% The high concentration of the exchange industry must be kept in mind, especially when looking at legal status specific breakdowns. In some categories, a few members financial figures are very dominant. The data set represents a limited population, so percentages can be quite skewed. The association/mutual only consists of only 3 members. Its figures represent the situation of the two continental Chinese exchanges. The third exchange of this category, Bolsa de Comercio de Buenos Aires only accounted for 1% of the revenues of associations in. The demutualized group is dominated by Tokyo Stock Exchange, Korea Exchange, Taiwan Stock Exchange, and National Stock Exchange of India that accounted for 84% of the revenues. These figures show an obvious Asia-Pacific bias as noted above, too. The listed group is dominated by NYSE Euronext, NASDAQ OMX Group, CME Group and Deutsche Börse, which represented, respectively, 20%, 15%, 14% and 14% of the total revenues of this group in. Even though the performance of listed exchanges varied significantly in, it is probably the most homogeneous group. The "private group is largely dominated by SIX Swiss Exchange. Taking into account these biases, we will mainly use the listed group when looking at breakdown by legal status. 22 World Federation of Exchanges Cost & Revenue Survey November 2011

23 3.2.3 Review by regions As mentioned in previous surveys the recent transcontinental mergers have challenged the geographical breakdown. When taking into account the location of the holding company, a US bias appears as NYSE Euronext and NASDAQ OMX are consolidating their financial statements in the US. The Americas time zone thus represents more than 50% of total revenues and costs. EAME 23% EAME 30% Total revenues breakdown Total costs breakdown Asia Pacific 25% Americas 52% Asia Pacific 19% Americas 51% In order to get a better sense of where revenues and costs are generated the survey asks for a breakdown of revenues per time zone. NYSE Euronext and NASDAQ OMX 1 both generate more than two thirds of their revenues in the Americas time zone. Deutsche Börse generated 8% of its revenues through International Securities Exchange in the United States. The following figures take into account these adjustments. EAME 30% Adjusted revenues breakdown Asia Pacific 24% Americas 46% As noted last year another effect of the consolidation has been the dominant position of Deutsche Börse in EAME region, accounting for 45% of total revenues and 62 % of costs. 1 These percentages reported in the exchanges annual reports (Form 10-K) are on a gross revenue basis. Nevertheless, according to Nasdaq OMX the percentage on a net revenue basis better reflects their revenue distribution. All of their cost of revenues is in the U.S. and is primarily related to transaction rebates and pass through SEC Section 31 fees. For Nasdaq OMX, the net revenue split for was 66% U.S. and 34% non U.S. and the expense split was 61% U.S. and 39% non-u.s. World Federation of Exchanges Cost & Revenue Survey November

24 3.2.4 Review by size The industry concentration slightly decreased compared to 2009 as the top 10 exchanges by revenues represent 74% of the total revenues against 75% in As noted earlier, the list of Top 10 exchanges by revenues remained unchanged. Others 26% Total revenues breakdown Others 27% Total costs breakdown Top 10 revenues 74% Top 10 revenues 73% Review by products As noted last year, the derivatives only category consist of only two exchanges, CME Group and IntercontinentalExchange, which have a considerable weight (15% of total revenues, 12% of costs). The gap between revenues and costs does indicate higher profitability. This performance is largely attributable to CME Group, which is the first exchange in terms of net income. Cash only 8% Cash only 7% Derivatives only 15% Total revenues breakdown Derivatives only 12% Total costs breakdown Cash & derivatives 77% Cash & derivatives 81% 24 World Federation of Exchanges Cost & Revenue Survey November 2011

25 3.2.6 Review by post-trade activity As mentioned in previous studies, members active in post-trade generate the overwhelming majority of revenues (88%) to be compared with 74% of the total membership. The results of members not active in post-trade are heavily influenced by the two continental Chinese exchanges 1 and CBOE, which in total represent 85% of the revenues of this category of members. No post-trade 12% No post-trade 9% Total revenues breakdown Total costs breakdown Post-trade 88% Post-trade 91% Review by World Bank income categories The share of low income countries in costs and revenues slightly increased in (20% against 18% of revenues last year, and 14% against 13% of costs). It should be noted that the low income category is largely dominated by BM&FBOVESPA, Shanghai Stock Exchange, and Shenzhen Stock Exchange, which together represent two thirds of the total revenues of this category (and 67% of the total net income of this category). Low 20% Low 14% Total revenues breakdown Total costs breakdown High 80% High 86% 1 As noted earlier, Shanghai Stock Exchange and Shenzhen Stock Exchange jointly own the China Securities Depository and Clearing Corporation (SD&C) but it is an independent entity and the revenues from SD&C are not consolidated. World Federation of Exchanges Cost & Revenue Survey November

26 Exchanges in the low income category represented a higher share of the total net income (+33%). Indeed, the profit margin of three exchanges that dominate this category were significantly higher (between 49% and 54%) than that of exchanges from high income countries (26%). Low 33% Net income breakdown High 67% 26 World Federation of Exchanges Cost & Revenue Survey November 2011

27 3.3 Equity capital Total equity capital of members reached USD 75.9 billion in. The listed exchanges concentrate most of total capital (81%) among WFE members. As SIX Swiss Exchange figures are not available; the category private is not representative of what the full amount of capital is likely to be Total equity (USD billion) 70 +4% % +16% +10% +19% Association Demutualized Listed Private Other 2009 In terms of regional breakdown, the Americas strongly outweigh the other time zones in : 63% of the membership equity base is there. Asia Pacific 23% EAME 14% Equity capital breakdown Other 3% Private 1% Equity capital breakdown Demutualized 7% Association 8% Americas 63% Listed 81% World Federation of Exchanges Cost & Revenue Survey November

28 Not surprisingly, exchanges active in post-trade concentrate most of the equity capital (91%). CME Group and IntercontinentalExchange concentrate 30% of equity capital for the entire industry 1 (26% for CME Group alone). No post-trade 9% Cash only 6% Equity capital breakdown Derivatives only 30% Equity capital breakdown Cash & derivatives 64% Post-trade 91% 1 Excluding SIX Swiss Exchange, equity figures being reported by all the exchanges but SIX Swiss Exchange. 28 World Federation of Exchanges Cost & Revenue Survey November 2011

29 3.4 Net income Net income was up 22% (+20% in constant USD) at USD 8.40 bn Globally, as market conditions improved, members continued to improve their net income results in after the record losses experienced in This improvement was partly due to the increase in revenues (+2.9%), and the decrease in costs (-3.7%). Demutualized exchanges experienced the highest growth (+216%) in, mainly due to the fact the only two exchanges that reported losses in 2009 were coming from this category. Listed exchanges followed with a 23% growth rate driven by NYSE Euronext whose net income increased 163% (mainly due to the 83% decrease of merger expenses and exit costs as explained earlier). By contrast Deutsche Börse s net income decreased by 16% following the impairment loss on International Securities Exchange s intangible assets, and costs in connection with efficiency programme (see paragraph 3.2). Regarding associations, the two Chinese exchanges, representing 98% of the net income in this category, experienced opposite trends leading to a total growth rate equal to zero for this legal category Net income (USD billion) 7 +23% % +216% -13% -11% Association Demutualized Listed Private Other 2009 World Federation of Exchanges Cost & Revenue Survey November

30 The association exchanges represented by Shanghai Stock Exchange and Shenzhen Stock Exchange clearly outperformed the other categories, since they represented 14% of the total net income while their share of revenues and costs were 8% and 5%, respectively. With a 41% of growth rate, the Americas time zone became dominant in terms of net income (40% of the total against 35% in 2009). This positive growth was largely driven by the improved performance of NYSE Euronext. Exchanges offering post-trade services still have a lower weight in net income (83%) than in revenues (88%) due to higher costs (91%). But, we remind that these percentages are skewed by the size of Shanghai Stock Exchange and Shenzhen Stock Exchange, which accounted for 72% of the revenues of exchanges without post-trade services. Other 6% Private 1% Demutualized 9% EAME 20% Net income breakdown Association 14% Net income breakdown Americas 40% Listed 70% Asia Pacific 40% No posttrade 17% Net income breakdown Derivatives only 16% Cash only 9% Net income breakdown Post-trade 83% Cash & derivatives 75% 30 World Federation of Exchanges Cost & Revenue Survey November 2011

31 3.5 Profit margin The net profit margin (net income / total revenues) increased from 26% to 31% in and reached one of its highest levels since Only in 2007 was a higher ratio observed (39%). As noted in last year s survey, listed exchanges slightly underperformed the industry average with a 27% profit margin. Associations still largely outperformed the average with a 52% profit margin, but that is more a result of circumstances than their legal form. 70% Profit margins 60% 50% 53% 52% 58% 55% 40% 30% 20% 13% 37% 23% 27% 38% 32% 10% 0% Association Demutualized Listed Private Other 2009 The breakdowns by time zone confirmed the outperformance of Asia Pacific already noted in the previous surveys. 60% Profit margins 50% 45% 48% 40% 30% 24% 28% 26% 26% 31% 20% 17% 10% 0% Americas Asia Pacific EAME Total 2009 World Federation of Exchanges Cost & Revenue Survey November

32 The breakdown according to post-trade is provided for information only, but readers should keep in mind that the exchanges not providing post-trade services are a minority within WFE membership and the figures are largely dominated by the two continental Chinese exchanges Profit margins 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 47% 45% 29% 31% 26% 23% No post-trade Post-trade Total World Federation of Exchanges Cost & Revenue Survey November 2011

33 3.6 Return on Equity (ROE) The industry average ROE increased to 11% in This is a slight increase compared to 2009 (10%), the net income increase (+22%) was offset by increase in equity ROE 30% 27% 25% 20% 24% 20% 20% 22% 17% 15% 10% 11% 8% 10% 5% 0% 2% Association Demutualized Listed Private Other 2009 As noted last year, exchanges in the Americas have a relatively low ROE, but this is the only region that experienced a growth of ROE in ROE 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 18% 18% 16% 16% 11% 9% 7% 5% Americas Asia Pacific EAME Total 2009 World Federation of Exchanges Cost & Revenue Survey November

34 The performance gap between the exchanges engaged in post-trade and the others tightened in as they increased significantly their ROE whereas exchanges without post-trade 1 services had a lower ROE ROE 30% 25% 20% 26% 20% 15% 10% 8% 10% 9% 11% 5% 0% No post-trade Post-trade Total We remind that these percentages are skewed by the size of Shanghai Stock Exchange and Shenzhen Stock Exchange, which accounted for 72% of the revenues of exchanges without post-trade services in. 34 World Federation of Exchanges Cost & Revenue Survey November 2011

35 3.7 Price Earnings Ratios The average (not weighted) P/E ratio for listed exchanges was 20.3 at the end of. Price Earnings Ratio 2009 Stock Net income perf. variation Athens Exchange % -28% Australian Securities Exchange % 8% BM&FBOVESPA (2) % 30% BME Spanish Exchanges % 3% Bolsa de Comercio de Santiago % Bolsa de Valores de Colombia % Bolsa Mexicana de Valores 0.7 NA 74% 12% Bursa Malaysia % -35% Chicago Board Options Exchange 22.2 NA -22% -7% CME Group % 15% Deutsche Börse (1) % -16% Hong Kong Exchanges and Clearing % 7% IntercontinentalExchange (1) % 26% Johannesburg Stock Exchanges % -4% London Stock Exchange Group % 71% NASDAQ OMX Group % 48% NYSE Euronext % 163% Osaka Securities Exchange % 111% Philippine Stock Exchange % 101% Singapore Exchange % 5% TMX Group (1) % 88% Warsaw Stock Exchange 21.7 NA -6% WFE average % 23% DJ Global Exchanges Index 7% (1) Calculated by WFE (2) Source ERDesk Earnings measured by the net income increased on average faster than the share prices, logically leading to a lower average PER in than in World Federation of Exchanges Cost & Revenue Survey November

36 4. Revenues 4.1 Total revenues breakdown Trading and services remain the top contributors to total revenues (87%) For most derivatives markets, we are not able to make the distinction between trading revenues and clearing fees that we usually classify as services revenues. This is why the breakdown of types of revenues has been modified this year. Instead of distinguishing trading revenues from services, this year we have three categories: trading revenues for cash products, trading and clearing fees for derivatives, and services other than clearing fees for derivatives. Financial income 3% Other 3% Listing 6% Other services 25% Revenues breakdown Trading excl. derivatives 36% Trading & clearing fees for derivatives 27% Trading revenues from cash markets slightly decreased in whereas revenues from derivatives increased significantly (+14%) in line with the growth of volumes. The listing revenues also increased, but to a lesser extent (+4% in constant terms). % change % change % of total (USD million) (USD) (const. USD) revenues Listing % 4.2% 6.3% Trading excl. derivatives % -3.9% 35.6% Trading & clearing fees for derivatives % 14.4% 26.7% Other services % 1.8% 24.9% Financial income % -10.6% 2.9% Other % 1.7% 3.5% 36 World Federation of Exchanges Cost & Revenue Survey November 2011

37 4.1.1 General market performance in As underscored in previous reports, the financial performance of exchanges is quite evidently related to the market environment. In, the equity market capitalization was significantly up - that generally has a positive influence on revenues, since a lot of exchanges fees are, at least partially, based on value of trading. But share trading volumes increased much more slowly (+2.8%), and the number of trades decreased by 12.3%. The most significant trend was the increase of derivative contracts traded (+25.7%), explaining the high level of growth of trading and clearing fees for derivatives. The number of newly listed companies more than doubled in Asia-Pacific and EAME, but the value of investment flows in USD only increased by 11%, explaining the relatively low increase in listing revenues in. Domestic market capitalization (USD millions) Average index performance % change (USD millions) /2009 (USD) (loc. currency) Americas % Americas 13.7% 12.8% Asia-Pacific % Asia-Pacific 12.8% 5.5% EAME % EAME 6.0% 8.3% WFE % WFE 11.0% 9.3% Value of share trading - EOB trades Number of EOB trades % change % change (USD millions) /2009 (millions) /2009 Americas % Americas % Asia-Pacific % Asia-Pacific % EAME % EAME % WFE % WFE % Number of derivative contracts traded % change (million contracts) /2009 Americas % Asia-Pacific % EAME % WFE % Number of listed companies Number of newly listed companies % change % change /2009 /2009 Americas % Americas % Asia-Pacific % Asia-Pacific % EAME % EAME % WFE % WFE % World Federation of Exchanges Cost & Revenue Survey November

38 4.1.2 Historical trends The historical perspective shows that listing revenues are declining as a proportion of total revenues. Other revenues are more variable. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Historical revenues breakdown Listing Trading Services Financial income Other Revenues breakdown by legal status Association and mutual exchanges still have an overwhelming share of their revenues generated by trading (91%). This may also reflect their less diversified product offer as much as their legal form. Concerning listed exchanges, their revenues are largely generated by trading and services, the latter (28% - excluding clearing fees for derivatives) being above the industry average, and the highest percentage among the five legal groups. The relative importance of listing revenues among private exchanges is explained largely by the Irish and Luxembourg exchanges, with their extensive listed product range for bonds, public funds and certain other financial products. SIX Swiss exchange and Tel-Aviv Stock Exchange also have a higher share of listing revenues than the average (respectively 10% and 15%). 38 World Federation of Exchanges Cost & Revenue Survey November 2011

39 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Revenues by legal status Association Demutualized Private Listed Other Listing Trading cash Derivatives Services Financial income Other Revenues breakdown by region 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Revenues by region Americas Asia Pacific EAME Total Listing Trading cash Derivatives Services Financial income Other Year on year, the regional breakdown was quite stable. One of the most important changes was the increase of service revenues in the Asia-Pacific region (+21%) taking the share of service revenues in this region to a level close to the global industry average. All the growth rates observed in this region in were significantly positive, the lowest one being 6% for Honk Kong Exchanges and Clearing followed by Singapore Exchange (+17%). In the other regions, service revenues decreased or remained stable: -6% for Americas and +2% for EAME. World Federation of Exchanges Cost & Revenue Survey November

40 4.1.5 Revenues breakdown by post-trade activity This breakdown gave results that could be largely anticipated, with revenues from services excluding clearing fees for derivatives accounting for 27% of total revenues for exchanges offering post-trade services. For cash markets, post-trade revenues are accounted for in the services business line. Derivative revenues for exchanges without post-trade services came mainly from CBOE (90%). Services 5% Financial income 4% Other 2% Listing 3% Financial Other income 4% 3% Listing 6% Derivatives 12% Revenues breakdown No post-trade Services 27% Revenues breakdown Post-trade Trading cash 31% Trading cash 74% Derivatives 29% 40 World Federation of Exchanges Cost & Revenue Survey November 2011

41 4.1.6 Revenues breakdown by products Financial income 3% Other 4% Listing 8% Services 8% Financial Other income 2% 5% Listing 7% Services 29% Revenues breakdown Cash & derivatives Revenues breakdown Cash only Derivatives 18% Trading cash 38% Trading cash 78% Other services 13% Other 2% Revenues breakdown Derivatives only Transaction and clearing fees 85% World Federation of Exchanges Cost & Revenue Survey November

42 4.2 Details on trading revenues Driven by derivatives (+14%), trading revenues were up 4% across WFE membership in. We remind readers that clearing fees are included in derivatives revenues. There is thus a bias when comparing cash and derivatives trading revenues. In Europe, the increasing competition from alternative trading systems on cash markets led regulated exchanges to launch their own MTFs: - NYSE Euronext operates, with joint venture partners, SmartPool (a dark MTF for trading pan- European stocks including NYSE Euronext s four national markets) and NYSE Arca Europe (an MTF for trading the most active pan-european stocks that are not already traded on NYSE Euronext s four national markets). Also in July, NYSE Euronext announced that it was creating the first pan-european Multilateral Trading Platform for Euro-denominated corporate bonds. - In February, the London Stock Exchange Group acquired Turquoise, an MTF on which traders can access pan-european and US equities. Moreover, in response to aggressive price competition led by new entrants, existing exchanges also had to reexamine their pricing structure to ensure that their fees remained competitive. This did, at least partly, explain the decrease of trading revenues on cash markets in. 42 World Federation of Exchanges Cost & Revenue Survey November 2011

43 4.2.1 Trading revenues by product Despite their decrease (-4%), cash equity revenues remained the predominant source of top line revenues. The reader has to keep in mind that the percentage given here is not entirely precise, since clearing fees were included in derivatives revenues for most exchanges, and that some members do not provide details on their trading revenues breakdown. Other 4% Derivatives 45% Trading revenues breakdown Cash 49% Bonds 2% Two exchanges, NYSE Euronext and Nasdaq OMX, garnered an important part (47%) of worldwide trading revenues from cash markets. Revenues generated from bond trading increased by 14% in, but their share in total revenues remains much lower than for other products. World Federation of Exchanges Cost & Revenue Survey November

44 4.3 Details on service revenues Revenues from services for cash markets remained stable (+1.8% in constant terms) compared to (the share of post-trade services is undercounted, as for most derivative markets, clearing fees are not included here). IT sales and services 13% Other 6% Services revenues breakdown Post-trade services 44% Market data 37% Post-trade services as a whole 1 (clearing + settlement + other post-trade services) remain the main contributor to service revenues (44%) despite a slight decrease (-4%) in. In May, NYSE Euronext announced that, subject to regulatory approval, it will commence clearing its European securities and derivatives business through two new purpose-built clearing houses based in London and Paris from mid Revenues derived from market data still represented the second important component of the services revenues (37%); they were slightly up (+5%) compared to In recent years, several exchanges reinforced their position in the stock indices business: in December 2009, Deutsche Börse and SIX Group acquired the shares held by Dow Jones in Stoxx Ltd. In March, CME Group bought 90% of Dow Jones Indexes. London Stock Exchange had created FTSE with the Financial Times in 1984, so that has been a longstanding source of market data revenue. IT sales and services are highly concentrated among a few exchanges: NYSE Euronext, NASDAQ OMX Group, and Deutsche Börse accounted for 71% of the total. They experienced significant growth in (+15%). 1 Taking these revenues as a whole make sense, since details of how revenues are spread between the three categories are not always available. 44 World Federation of Exchanges Cost & Revenue Survey November 2011

45 4.3.1 Services revenues breakdown by region As noted last year, the geographical breakdown shows a quite balanced picture for each time zone, but regional breakdowns should be treated carefully because of the transatlantic mergers. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Services revenues by region Americas Asia Pacific EAME Post-trade services Market data IT sales and services Other In, clearing and settlement revenues increased very rapidly in the Americas and Asia Pacific region (respectively +28% and +23%) whereas they decreased in EAME (-5%). The same trend was observed for IT sales and services (+25% in the Americas, +24% in Asia Pacific and -2% in EAME) but in Asia Pacific the absolute amounts are small. For regulated exchanges, it is very important in the current context of greater competition to develop technological innovations in order to enhance the speed and quality of trade execution, and so to attract additional sources of liquidity. In the Americas, the share of market data revenues is larger than in other regions. World Federation of Exchanges Cost & Revenue Survey November