Not your stock-standard stock exchange

The London Stock Exchange has been innovating since 1698. Today it’s attracting investors both for its disruptive technology and an extraordinarily powerful business model.

The London Stock Exchange Group (LSEG) is headquartered in Paternoster Square, London. It’s a state-of-the-art trading centre but the architects laid it out so it opens “new vistas to St Paul’s Cathedral.” That’s Christopher Wren’s masterpiece, finished in 1710.

It’s fitting the building looks to a glorious past, because so does LSEG. The birth of share trading in London goes back to Jonathan’s Coffee House in 1698. LSEG’s story is bound up with that sometimes quirky history.¹

In 1812, the first rule book for the trading floor specifically banned football – and fireworks. But the London Stock Exchange, its forbears and descendants, also underpinned the long-term growth in securities trading that helped finance “the empire on which the sun never set.”²

A not-so-stock story

Today, LSEG is driving disruption in financial data and fixed income trading and has a business model that unites them. How did it evolve? Why is Platinum invested? And what is the shape of its future?

• The London Stock Exchange Group was founded in 2007 when the London Stock Exchange merged with Borsa Italia. At that point, 50% of the group’s revenue came from listing and trading fees.

• Under the leadership of Xavier Rolet, LSEG bought the London Clearing House (the world’s largest clearing house) and then the Russell Indices business. By 2018, equities trading accounted for under 20% of revenue. Forty percent came from ‘Information Services’.

• In 2019 LSEG sealed this transformation by buying Refinitiv, a financial market data firm from Blackstone for US$27billion. Equities trading now brought in just 3c in every dollar of revenue.

First, disrupt yourself

Over a period of around 15 years, LSEG had disrupted itself. It had changed from an equity exchange business making money off trades to one paid to deliver equity, FX and fixed income indices and live pricing and reference data on every major asset class to 40,000 banks, fund managers and trading houses in 170 countries. Those customers pay LSEG a fee for its data, data they regard as essential to their investment decisions.

That kind of business – where your service becomes essential to your clients’ business - can be highly profitable. The revenue stream is predictable, both switching costs and barriers to entry are high and you’re in a position to set prices.

To drive even more revenue from their data business, LSEG has partnered with Microsoft. They’re moving their data offerings into the cloud, selling packaged analysis and insights and, crucially, using Microsoft’s expertise and resources to integrate AI into their customers’ workflows.

Then, disrupt the world’s biggest market

One of the themes of the classic business book, Liar’s Poker, is that the equity market is glamorous, but the bond market is big - really big. That holds true today. The global fixed income market (sovereign and corporate bonds) was worth $US100 trillion at the end of 2023.

As discussed in our recent video, playing in huge markets can be very rewarding and that’s what LSEG is doing in its latest disruptive move.

• Despite the size of the market, government and corporate bonds are still largely traded over the phone or by chat. By contrast, foreign exchange and equities trading is now 90% digital.

• Through its acquisition of Refinitiv, LSEG acquired its subsidiary, Tradeweb – the leading electronic trading platform for fixed interest. It’s now seeking to lead the digitalisation of fixed income trading.

History suggests that when asset class trading switches from analogue to digital, trading volume can increase between two and ten times.  Through Tradeweb, LSEG can capture a large share of this growing market and clip the ticket on each trade.

The business model and the virtuous cycle

Thanks to its unique mix of businesses – a combination of data and trading platforms – LSEG has created a virtuous cycle business model.

Its customers rely on its data platforms – and increasingly on AI-driven quantitative analysis - to underpin their trading decisions in equity, foreign exchange and fixed income markets.

They then trade those assets on LSEG trading platforms - creating ever more valuable data. Then pay for that data to drive their next sequence of trading decisions.

It’s an incredibly powerful business model and it underpins our belief that LSEG can grow revenue consistently year on year.

We were able to buy into LSEG at a discount when the company was swallowing the Refinitiv acquisition. Our view was that the deal would transform LSEG into a leading global financial data provider - however the rest of the market didn’t see this potential.

Today, the company has many vectors for growth and is market-leader in many of its segments. We see the Microsoft partnership as a very exciting call option that could accelerate its growth, yet that potential isn’t yet built into the share price. LSEG is held in Platinum’s International and European Funds and in the Platinum Global (Long Only) Fund.

Like to know more?

• In our two previous disruption stories we looked at a serial innovator (ICE) and an incumbent that fought back against disruption (Walmart).

• If you’d like to invest in Platinum funds, speak to your financial adviser. You can find information on investing with Platinum here.

^1. For more of this history – including the arrival of the ticker tape, the birth of the FTSE index and Margaret Thatcher’s Big Bang, see www.londonstockexchange.com/discover/lseg/our-history
^2. To be fair, a title also claimed by the Egyptians, Hapsburgs and Spanish.