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London Stock Exchange shares balance on Brexit knife edge


London Stock Exchange shares have been having sultry few days of it. The price has dropped from 3905 to 3827 over the past five trading days. We have been here before with London Stock Exchange group, (LSE:LSE). Look at the three month chart and you will see how London Stock Exchange shares rallied from 3745 on 25 September to hit a peak of 3954. This is the second such rally in the space of two months.

If you have been holding this stock since June, of course, you are still sitting on a nice profit. This is surprising, given the uncertainty that still continues to swirl around the UK financial markets as the British government stumbles from one gaff to the next as it seeks to find a way out of its Brexit quandary.

“At the moment 99% of the investors in eToro who trade LSE stock are bullish,” says Mati Greenspan, a Senior Market Analyst at eToro. “The shares have lavishly outperformed the FTSE 100 with a total of 33% gains so far this year.”

The City of London is particularly worried that it might lose its primacy as Europe’s leading financial market, and the London Stock Exchange is one of the jewels in its crown.

Among the key battlefields will be the considerable derivatives clearing business that currently runs through London. LCH is the derivatives clearing house in London that manages derivatives transactions for an industry valued at more than $450 trillion. It cleared over €170 trillion in euro contracts alone, some 75% of the EUR market, in the first nine months of this year. And the EU has stepped away from demanding that much of that is relocated to Europe post-Brexit, as there is a recognition that keeping much of this in one place helps to manage risks. Fragment it, and you risk another Lehman Brothers situation occurring.

LCH is majority owned by the London Stock Exchange but still, it is facing challenges. Deutsche Borse, which owns rival Eurex Clearing, would love a bigger piece of that pie.

There are also worries about Xavier Rolet, CEO of London Stock Exchange. Rolet has turned the London Stock Exchange from somewhere you traded shares into a massive behemoth in the clearing and financial data markets, which we would argue are now just as important. Rolet is a man of vision who also happens to be well-connected on the continent and capable of selling brand LSE in Europe. Rolet arrived at the helm of the company just before the global financial crisis hit, but take a look at the London Stock Exchange share price since he joined and you will see that investors have a great deal to thank him for. However, he is shortly to step down, leaving extremely big shoes to fill.

Just how big is hard to measure, but the London Stock Exchange is facing a range of major operational and technical challenges as the global landscape for financial securities is transformed by new technologies.

“It will be interesting to see who will replace [Rolet] when he steps down at the end of this year,” adds Greenspan at eToro. “In the meantime, as long as the financial sector continues to perform, this is an excellent stock to have in your portfolio.”

If it is tough for financial regulators to keep up with all this, it is even harder for stock exchanges, who have to also anticipate the requirements of the increasingly fickle banks and other market participants that make use of it.

“There’s certainly a sense that Xavier Rolet is leaving the LSE at the right time with the shares up over 30% year to date,” says Michael Hewson, Chief Market Analyst at CMC Markets. “However the run higher that we’ve seen since 2012 isn’t unique for a lot of company stocks in the UK benchmark. There is no doubt that with the advent of new technology and the challenges that Brexit is likely to throw up, the company faces a number of headwinds which a successor will have to deal with.”

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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