Trading bonanza masks perils for stock exchanges

But that does not mean stock exchanges are necessarily a better investment,as volumes are likely to fall back,exposing the real pressure on their business models.

“I don’t expect trading volume growth to return to 2005-2007 levels,so my outlook for the exchanges is fairly cautious,” said Richard Perrott,an analyst at Berenberg Bank.

European shares worth 1.12 trillion euros ($1.57 trillion)were traded in August,Thomson Reuters data shows,making it the busiest month since the fallout from the collapse of US investment bank Lehman Brothers,when 1.25 trillion euros traded in October 2008.

The average monthly turnover in 2010 was 786.2 billion euros,30 per cent short of August’s showing.

With about a third of September’s trading days complete and 313 billion euros of business already executed,the dial is still set to feast,not famine,but regression to the mean could put pressure on exchanges’ valuations.

Their shares are trading at 10.5 times estimated earnings,compared with a multiple of 7.8 for banks,and have held up relatively well in the past 12 months,even as operators cut fees to stem the tide of business leaving for cheaper rivals.

LSE shares are flat for the year,while NYSE Euronext is off 16 per cent,and Deutsche Boerse 21 per cent. That compares with a drop of almost 40 per cent for banks,their main clients,as measured by the European banking sector index.

But with competition showing no signs of cooling in a market characterised by low margins and unpredictable volumes,the region’s stock markets and the cut-price start-ups that are challenging them look set for a rough ride. Brokers say a fall in trading activity will particularly hit trading venues that have struggled to attract decent market share,and those without financially strong owners.

Europe has seen the rise of a spate of new trading venues known as multi-lateral trading facilities (MTF),which trade shares listed on other exchanges,after rules to increase competition were introduced in 2007.

Banks such as Goldman Sachs,Nomura and UBS all own an MTF,while Chi-X is owned by a consortium. Some MTFs,such as the LSE’s Turquoise,are in the hands of exchanges,while others are independent,such as Pipeline or QuoteMTF.