ISE: is the writing on the wall?

TRADING FLOOR:IT HAS BEEN a tumultuous time for the Irish Stock Exchange (ISE). Its market capitalisation has been more than halved since the heady days of the boom, it has endured the delisting of Anglo Irish Bank, the collapse in share price of financial stocks such as Bank of Ireland and AIB, while also struggling with launching new ventures such as exchange-traded funds. At the same time, its once lucrative specialist listings business is in decline. As the exchange launches its new corporate identity, with the aim of wooing international companies to list, can there really be a future for an independent Irish stock exchange?

It’s not the first time that the future of the exchange looked uncertain. When it achieved independence from the London Stock Exchange (LSE) back in 1995, its position as a minnow in global market terms meant that survival was unsure.

However, rather than focusing on the equity side of the business, the exchange capitalised on the global growth in investment funds, positioning Ireland as the world’s leading centre for the listing of such products, later expanding it to debt vehicles. This move not only secured the exchange’s future, but lead to a booming new revenue stream. As a result, the exchange hasn’t been as vulnerable to the equities turmoil as other exchanges – which is just as well given that equity trading volumes have been slashed, from a record €54 billion in the second quarter of 2007 to just €11.7 billion for the first three months of this year.

“The ISE was very wise not to have become part of the hyper-competitive fight for cash equities business. Almost each month a new exchange/multilateral trading facilities is changing its pricing structure to attract more business,” notes Kieron O’Brien, a director with Rosenblatt Securities.

The exchange’s dependence on specialist listings has also meant that the growth in MTFs such as Chi-X has not hurt it as much as other exchanges. While exchanges such as the LSE have seen their trading volumes shrink because of the emergence of MTFs – for example, the LSE’s share of UK trading has fallen to almost 50 per cent, compared with close to 90 per cent back in 2008 – the ISE hasn’t been impacted to the same degree.

In fact a bigger challenge for the ISE, says O’Brien, is to convince Irish stockbrokers to trade on it – despite such broad ownership of the ISE among Irish brokers, support is not always forthcoming.

“With deep liquidity resting in the UK and the MTFs for many of the dual-listed securities, a lot of Irish brokers have a real option to trade on the LSE and other venues offering attractive rate for flow,” O’Brien notes. And, with global markets still in turmoil, the exchange has suffered a significant loss in revenue from its critically important specialist listings business.

In the boom times, about 100 funds a quarter could list on the ISE, but the latest statistics, for the first quarter of this year, show that this has since dropped to less than 30. The exchange has also been hit by delistings. As of March 30th, 2007, there were almost 2,000 funds listed on the exchange – by the end of the first quarter of this year however, the number had dropped by 36 per cent to 1,243. And debt securities have also suffered a similar cull. Back in 2007, about 30 new programmes were being listed each quarter, with an additional 3,000 tranches. Looking at this year however, just five new programmes were listed in the first quarter, and only about 600 tranches.

Indeed the exchange itself acknowledges that the business remains “challenged . . . in the short to medium term”. Nonetheless, it expects some recovery and growth opportunities through product and geographic diversification as the overall global economy emerges from recession.

And if specialist listings are struggling, listings of companies on the main market also remain very subdued, having almost halved since the heady days of 2000, with just 39 companies now a part of it.

Moreover, the exchange can expect an imminent loss in revenue as the Financial Regulator is currently in the process of taking back responsibility for certain market supervision activities, which it had delegated to the exchange, such as prospectus directive review – which raises the question of whether or not the exchange can survive as an independent entity?

It is already consolidated with Deutsche Börse at an infrastructural level, and consolidation remains on the agenda of exchanges around the world. While ISE chief executive Deirdre Somers has avowed that the exchange isn’t for sale, its ownership structure – it is owned by seven Irish brokers – also stands in the way of a potential merger.

“The biggest hurdle is the ownership structure,” says O’Brien. “However, all things being equal it has a lot going for it – a great management team in place, excellent positioning in the market with its fund listing, debt and ETF business lines – but its ownership structure is too restrictive to allow it to move quickly. They also have the challenge of dependency on third-party technology.”

In any case, a future without a national exchange would spell trouble for Ireland’s small to medium-sized enterprises (SME), which are provided with an essential outlet for funding through an indigenous exchange.

Although the ISE’s smaller companies market may have had a slow start, it now has 24 companies listed on it, and the latest firm to join it, Conroy Diamonds and Gold, believes it plays a vital role in Ireland’s capital markets. Although the mining firm had first listed on London’s Alternative Investment Market (AIM) back in 2001, it took the decision to list on the ISE last December for a number of reasons.

“Firstly, as we move forward it’s important to be on a local exchange,” says Prof Richard Conroy, chairman of Conroy Diamonds and Gold, adding that an Irish listing also facilitates smaller investors who wish to trade in euro. Another factor was the “practicality of it, it’s not an expensive market, it’s very reasonable in terms of its costs”.

“By and large we have found it very satisfying,” he says, adding that while the firm hasn’t had a tremendous amount of business from the listing, it has improved the firm’s profile. “AIM companies are quite often not reported on in the Irish media,” he notes.

And, given the current credit-strapped environment, and the unwillingness or inability of banks to lend to businesses, the ability of an exchange to offer small to medium-sized companies the chance to raise funds is invaluable.

It is for this reason that the UK Liberal Democrat party has been promoting the creation of regional stock exchanges across Britain to act as “regional platforms, matching local investors with growing SMEs to provide cost-effective access to equity”.

As Conroy notes, the “banking situation is dire from a corporate point of view”, which is why “it’s a great thing we have it ”, as it means that smaller companies have somewhere to go and raise funds – or at least have the possibility of raising them.

The ISE has also started to sing this tune a lot louder of late. In February, Somers told the Financial Timesthat SMEs were becoming "more and more disenfranchised from the world of stock exchanges" and that there was a need to focus more on the "specific, bespoke needs of mid-caps" which are "under-broked and under-analysed".

As part of its efforts to attract more SMEs to list on the exchange, it has supported and hosted a number of events which are targeted at the sector such as NovaUCD, Enterprise Ireland, Halo Business Angels Network and last year’s EU Finance Day for SMEs.

A further opportunity for the exchange is identified by Conroy, who points to the efforts made by London’s AIM to attract companies from developing countries. “Maybe we could do something like that,” he says.

Indeed, it looks as if it’s already on the exchange’s agenda. It has recently rebranded its smaller companies market from the Irish Enterprise Exchange (IEX) to Enterprise Securities Market (ESM) in order to “align with the fact that the existing market is available to international companies”, and says it has “been pro-actively promoting membership to deepen the liquidity and interest in the Irish market among international participants”.

Nevertheless, despite such efforts, according to the exchange there are no new listings for the ESM in the pipeline. And the big challenge for the ISE will be to make money from the SME market. As Somers herself said in a speech to politicians and policymakers in Brussels last month, “SME markets are fundamentally loss making”.

So where will the money come from? According to an ISE spokeswoman: “Some key areas for expansion include the development of new add-on services associated with our listing business and the sale of information and data from our markets.”