Systematic Internalisers - How Much Risk do They Pose to the Exchanges?
* Impact of Systematic Internalisers to be one of the Great Unknowns of MiFID II
MiFID II means change for cash equity infrastructure in Europe. The two biggest changes will be the implementation of the Double Volume Cap (DVC) on the amount of trading that occurs at dark venues and the impact of the expanded systematic internaliser (SI) regime. We expect the DVC will be a positive catalyst to exchangetraded volumes in the near-term. But these near-term share gains are likely to be reversed as the importance of SI's grows and their market share expands to 600bp of total trading volumes in Europe. We believe it could take several years for SI to achieve their equilibrium market share.
* Net impact of DVCs & the SI Regime to be Moderately Negative for Exchanges
We forecast the long-term net impact of DVCs and SI regime will be a moderate loss of market share for the exchanges (-170bp). That said, there is a high level of uncertainty with regards to the market share gains the systematic internalisers will generate.
* Earnings at Euronext & BME are most Exposed to Market Share Changes
Given the uncertainty surrounding how the cash equity market will be impacted by MiFID II, especially with regards to the market share gains of systematic internalisers, we have examined both upside and downside scenarios to stress the EPS impact to the exchanges of differing outcomes. Looking at our downside scenario, where SI's achieve 15% market share in a 24 month time frame, ENXT's 2019-20 EPS is most negatively exposed (5-6% EPS hit), followed by BME (3% hit), LSE (2% hit) and DB1 (<1% hit). Among the US Exchanges with European cash equity exposure (NDAQ & CBOE), the
EPS impact would be <1%.
* We Continue to Prefer ENXT, DB1 & NDAQ (All Buy-Rated)
In our neutral (base) case scenario, we expect the SI's to gain 6% market share of cash equity trading in 2020. But in a scenario where they gain more, ENXT would be most negatively impacted. Investors who expect the SI's to gain more market share than our Neutral case scenario should consider DB1 (rated Buy), as they are the least impacted by
potential market share gains from SI's. Among the US exchanges with exposure to European cash equities, we prefer NDAQ (rated Buy) over CBOE (Neutral).