Is the London Stock Exchange in trouble?

Ryan Van Parys        

 

http://www.guardian.co.uk/business/2008/sep/07/londonstockexchangegroup.stockmarkets

 

The good old days of traders enjoying robust fees may soon be over for the people of the London Stock Exchange. For years, the London Stock Exchange, or better known as the “LSE” has survived the threat of rival tech based exchanges due in large part to surging high worth investments like hedge funds. However, the latest threat of lightening fast trading and substantially cheaper fees brought on by a multitude of trading platforms may be too much for the LSE to handle. For instance, Wachman cites Project Turquoise, Chi-X, Nasdaq OMX, and Bats Trading as all viable threats to the LSE’s market share. Apparently, Wachman is not the only one who thinks this isn’t true: the London Stock Exchange’s share price has fallen by over half of its original price 18 months ago. The article points to a few quotes by the president of the new Nasdaq OMX who credits cheaper fees, faster electronic trading, and access to trade across Europe instantaneously as a reason for why the best days of the LSE are over. Others disagree, stating that the steady flow from revenues earned due to listing services, expansion of alternative investing markets, and prestige of having money in the LSE will keep the Exchange prosperous.

            While this article is not entirely technical by any stretch of the imagination, I found the issue to be particularly engaging because we talked about how technology affects the securities market extensively in class last week. The article mentions how the NYSE has lost 50 percent of its market share due to increasing competition from other exchanges that provided customers with faster services through the advantage of technology. While the LSE’s market share numbers are bound to narrow due to natural maturation of financial markets, it is interesting to note how the attitude towards trading seems to have really changed since the invention of e-trading and/or e-platforms. Many investors seem to be more interested in the lowest fee possible and doing their own research, rather than trading on a notable but expensive exchange. I think this can be attributed to a number of technological advances such as the open access to all of the corporate and market research that the internet has to offer, and the easy ability to now essentially perform a trade with one click. Additionally, I think (some) investors are backing down from name recognition for every day trades and are focusing on exchanges like the LSE only when they want to invest in an alternative security. However, the article does admit that the prestige of the LSE still is a very big deal. I would even suggest that if it wasn’t for its name recognition and its ability to monopolize the English market on the listing fee business, I don’t think the LSE would be nearly as competitive as it still is today.

            I found the part of the article which discussed how the LSE is staying alive to be particularly interesting. In addition to its alternative securities and name recognition, it also is receiving, ironically, what the article mentions as a “tariff” by the British government. It seems very strange to me that the British government would implement a tariff to a market driven aspect of the economy, especially against exchanges that may bring more efficiency and growth to Britain’s markets, or encourage investment. I think it would be interesting to research other European exchanges and see if their governments are practicing the same type of protectionism in their own financial markets. If so, it certainly poses quite a contrast to the US approach.

http://www.guardian.co.uk/business/2008/sep/07/londonstockexchangegroup.stockmarkets

In search of a floor: Is America’s house price crash at last bottoming out?

http://www.ft.com/cms/s/0/91dd4430-7ea0-11dd-b1af-000077b07658.html

Since the crash of the housing market 18 months ago, financial institutions have been falling left and right with Washington Mutual looking to be the next victim. It has turned into a waiting game of the most epic proportions. Just trying to stay afloat at this point, banks are waiting for some kind of inclination as to where the bottom of this market is. Once a stabilization point is established Banks can get a firmer grip on their total losses and start once again to build credit. In this article from Tuesday’s Financial Times, things seems to be pointing up as Americans are perceived to be getting back into the housing markets. Price declines have fallen from 2.2% in February to .5% in June. In addition, the recent government backing of Fannie Mae and Freddie Mac has given markets a boost, and should help keep mortgage prices down and encourage Americans to purchase homes. All this however is but a small bright spot on what is an ugly U.S. housing market.

Though these signs point to the Housing market finally starting to, if not rebound, at least starting to stabilize, there are many very worrying signs that suggest that the market will not bottom out until well into 2009. The biggest worry is the rising foreclosure rate, which is up 183% in 2008 alone. Until this rate plateaus, it will be exceedingly difficult for Banks to predict the bottom of this crisis. A major concern came last week when the Fitch Rating announced that 92 billion in flexible payment loans would be subject to more stringent policies, thus making in harder on those borrowers and likely causing more foreclosures. This trend has been a common one as banks are desperate to sure up their capital with their borrowers. Amongst internal problems, the housing market is also facing serious external economic problems, the first of which being unemployment.

With eight consecutive months of job losses, the U.S. unemployment rate has jumped from 4.9% to 6.1%. Compound this with higher gas prices and the rising cost of foods, and it is not hard to see how the housing market could continue its downward spiral. Gas prices are hitting especially hard, as many of the foreclosures are coming from rural residential suburbs, where commuting via cars is much more common. OPEC isn’t helping the situation either as they just cut production as crude finally dropped below 100 dollars a barrel. As it stands now almost 1 in every 400 homes are being foreclosed.

The road ahead, though less rocky than what has already been traversed, seems to be long and enduring. Alan Greenspan said last month that housing prices could continue to slide through 2009 and some predict that we should be looking at a 2010 stabilization point. Either way we can only hope that what traction financial institutions have gained will be enough to hold them. Should unemployment continue to rise with inflation, the housing market could be in for a much-prolonged battle.

Government Bailout = Pimco Strikes Gold

Recent news of the US government's takeover of Freddie Mac and Fannie May catapulted the Pimco fund to a $1.7 billion gain on Monday. This is the highest one-day gain against its benchmark index. This is in sharp contrast with the investors of Fannie May and Freddie Mac, who suffered massive losses as a result of the news.

Fund manager Bill Gross' shift to agency bonds over the last year is largely responsible for the gain, dumping US T-bills and corporate bonds in order to compensate for his predicted US takeover of the two organizations. Pimco's took a huge calculated risk in this move, but had they not taken these steps, Pimco would be in a similar predicament that Freddie and Fannie investors faced on Monday. Morningstar reported that for the 12 months before August 1, Pimco had beaten all of its peers, gaining 9.2 percent.

Right now, Gross and other investors on the Pimco team must be thinking of what they're going to turn their newly minted $1.7 billion into. Judging by Gross' history, he seems to favor short term investments. Look for changes in the near future.

Brewster, Deborah. "Bail-out wins Pimco $1.7bn." Financial Times.

Primary Market Performance in a weak economy

History, as they say, repeats itself. The cyclical nature of the stock market and its corollary markets means that the economy will undeniably face some periods of “highs” and some periods of “lows”. We are currently experiencing a low period in the primary market. This assertion comes in the face of numerous firms tending towards insolvency, individuals increasingly declaring for bankruptcy, plummeting stock prices and a generally unhealthy financial industry. However, initial public offering deals (conversion of private limited liability company to a public limited liability company) seem to pass unnoticed.

In the article, “For IPO’s in August, a Sound Silence” Lynn Cowan talks about the small number of IPO deals that occurred during the month of August 2008. Even though the month of August is a time when a lot of people are on holidays, which will concurrently result to fewer deals being carried out, it is no excuse for the lowest number of deals since data providers started tracking the number and value of IPOs worldwide in 1995. Cross sectional data analysis reveals that August 2008 brought about twenty-five IPO deals worldwide as opposed to twenty-nine in January 1995, thirty-two in January 1998, and thirty-five in August 2003. Although the number of deals may not vary significantly, the monetary value in billions of dollars makes for a substantial difference. The article also talks about the August value of IPOs worldwide summing up to $1.25b, which is an 84.72% drop from the value of August 2007 IPO capital raising. This shows that not only are firms being majorly hit by a huge decline in company value, but raising capital is also a difficult task.

The world experienced an IPO boom for the last few years that provided companies with huge amounts of capital and also an optimistic stock market. With the huge declines in company valuations and one of the worst years of IPOs for companies and investment banks, one may wonder if the IPO bubble has come to an end. I believe it is too early to correctly assess this claim, especially because there has traditionally been an incumbent “recoil” period following periods of economic sluggishness. For instance, after the 9/11 attacks (Sept 9, 2001), the American economy experienced slow growth rates and thousands of layoffs, but was able to regenerate itself fairly well by 2004. I believe certain events such as the presidential election and the encouraging price of oil, will help the economy. It is only a matter of time before the economy experiences some stimulation in the form of investments, purchasing of government bonds and securities, reduction of the required reserve ratio, and positive fiscal and monetary policies. The chairman of the Federal Reserve – Dr. Ben Bernanke – is among those who can help to revitalize the economy. The big question though, is how soon will this be?


Lynn Cowan, “For IPO’s in August, a sound of silence”, Wall Street Journal, September 2, 2008.

Competitive Approach Taken to Outsourcing

This article talks about how companies, such as General Motors, are outsourcing jobs to multiple IT-service companies rather than just one. They are also shortening the length of the contracts they are making with the companies. By doing this they are increasing competition among the IT-service companies which is helping to lower their expenses. The IT-service companies are able to offer lower prices because with the shorter contracts they are able to perform services remotely using their own employees and equipment rather than those provided by the contractor. One example that is given is how Allstate hired one company to write a code for its software and hired another to analyze it for errors.

While multiple outsourcing and shorter contracts may be good for the companies making the contracts, I feel as though it is also making it more confusing for investors. When looking at financial data provided by the company, investors may be confused as to why there is an ever increasing number of companies that work is being outsourced to. All of the extra information that will be included on financial statements will make it more confusing to follow the activities of the company. The article talked about the benefits of multiple outsourcing for both the contractor and company accepting the contract, but it overlooked possible concerns of the investors. This is a very important issue that I felt should have been addressed within the article. There has been much talk about Sarbanes-Oxley because financial data has not been transparent enough for investors and I feel such a policy would hinder the transparency provided by the law. By overlooking this piece of information the article seemed to take on a one-sided view of multiple outsourcing.

The one negative issue that the article did address is the increased tension between companies that are competing for contracts. This plays a big role in the relations among IT-service companies and between IT-service companies and contracting companies. Some of the IT-service companies may become irritated at having shorter contracts and only being assigned a small part of the overall product. With the shorter contracts they have less security in future profits because they are not guaranteed to have work for as long as they used to. Multiple contracting does however bring about the possible growth of specialized IT-service companies.

Companies must take into consideration both the positives and negatives of multiple contracting and analyze individually whether it will help to earn them more profits or if it will harm their business relations and end up hurting them. Also, the IT-service companies may need to decide if they want to become more specialized at a certain task in order to provide higher quality service more efficiently.

Speculative Investing and the Oil Markets

• Report Faults Speculators 
For Volatility in Oil Prices
• Interim Report on Crude Oil

The Commodity Futures Trading Commission will soon make final a report on the impact that financial speculation can have on commodity markets. The focus of the article I looked at (linked here from the Wall Street Journal) is the potential of the report to shed light on the substantial fluctuations we’ve seen within oil markets in the past several months. Three senators who will be releasing the report advocate for the implementation of stronger controls for speculative investing, especially for institutional investors selling futures contracts.

Government controls have been threatening oil markets in past months since laws were passed in the senate to limit investments in the industry that were said to drive the price of oil higher. Market analysts, on the other hand, condemned such laws sighting special interests of politicians as the source for the debate rather than the concern for higher oil prices. The laws in themselves brought on shifts in the market that they were enacted to avoid as investors pulled out.

If the results of the report confirm that futures markets are a leading cause for the vast fluctuation of oil prices, I think that to some extent changes should be made to curb their impact. Because the price of oil influences nearly every industry to such an extent, it seems that by limiting fluctuations we could bring some stability into the economy. When traders representing institutions with impressive investment power invest in energy indexes, they have the potential to alter the market.

My speculation is that the Commodity Futures Trading Commission will not release a report in which they do not minimize the supposed impact that futures contracts has on the price of oil. This is because of a July 2008 report from the Interagency Task Force on Commodity Markets stating that the fluctuations are due to “fundamental supply and demand factors” rather than speculative investment practices (report also cited above). Because they don’t want to contradict this finding, they will limit the supposed impact that investor speculation has on the price of oil.

Politics has a central role in the debate. The spin that the three senators put on the results of the Commodity Futures Trading Commission report has the potential to mix opinions. The article brings up the often-questioned intentions of Mr. Masters, a forerunner in the “antispeculation movement,” and whether his position on the issue is dictated by his own portfolio or a sincere interest in rising oil prices.

Private Equity Firms: The Sharks of the Financial Aquarium

It has always been a challenge for proverbial watchdog to assume that all financial dealings in the markets are adhering to the same standards set by the government. With private equity playing an integral part in a financial credit cycle crisis, its trigger happy ways of using cut-rate financing to buy out companies, overloading the businesses with so much that they eventually go under, leaves the industry in humiliation, yet private equity returns year after year, yearning for more.

In today’s financial downpour, private equity assumes it is the right answer. Buy-out firms select from an array of companies eager for investment. Private equity’s strategy reveals that they are hunting for funds before they strike two-faced double deals amid the financial wreck yard of dilapidated balance sheets. In fact, you observe such firms including Carlyle and Texas Pacific Group, with close to $450 billion in war chests to invest; hiring people to run the banks they wish to take over, specializing in deceitful management picking off the weak establishments.


These buy-out firms come to the rescue with fixed aspirations of wanting a better deal than the last. With soaring fixed costs, private equity firms sink themselves into the top ranks of the company with a dictum of whatever it takes, will be done quota.

For the sharks of private equity, thinking that they are appealing to the more sophisticated investors, these vigilantes need to be put to serious review. Regulation needs to level the playing field that will not offer leverage as incentive without assessing a risk that society has to bear. These firms need to pay for both the upside and the downside of their financial buy-outs. If more regulation were put into place then it would allow for a fresh start to private firm buy-outs, truly putting these firms to the test, instead of watching them tote the thought of being “masters of the financial universe”. Let the private equity firms expose the ingenious ways of making corporations to roll over and drain them dry.

There needs to be a guarantee that when it boils down to it, private equity abides to a set standards of buyout practice so that it won’t come down to a complete disaster. The way it should be seen is that American needs this ownership regulation to prevent all the private equity firms rising to the top of the credit cycle. The companies bought out are left burnt badly by such an overturn. They have no means but to rely on private equity to act as the lone ranger and come to the rescue since they cannot increase equity in their market. In my mind, this is not remotely and idea of speculation where any leeway for interpretation could exist. Rules are necessary to ease and prevent crisis that are generated by such firms already. Until the federal government realizes this gray area needs regulation, the only barrier between these two thresholds is a holding act that cannot play big brother and watch over every company vicariously.

"Loan Rangers." The Economist. 28 Aug. 2008. www.economist.com/finance/displaystory.cfm?story_id=12007269>