Euronext N.V. (ENX) Earnings Call Transcript & Summary

Okay. Good afternoon again. We're just going to restart the session. This time, we'll be covering the Data Centre and the Optiq migration. So the reason why you have this duo of Simon and myself is that on one side, the Data Centre and the Optiq migration are very significant technology investment, probably our largest technology investment, I would say, in this whole program. But at the same time, the impact that it has on the trading macro structure are also significant and Simon will walk through this as we go through the sessions. So I mean we clearly live it all the time, but I'll probably spend a little bit of time explaining what is a data center for us, what it provides in terms of services, and then obviously, understanding like what is the end or the impact of that. So a data center is really the modern day trading pit. So 2 floor above, you have the trading pit, the old trading pit of Borsa Italiana, which essentially is a large space where traders used to interact with each other and provide each other prices and so on. And then those traders would get communication from runners that used to go to the brokers and get a ticket and say, a client wants to buy this, a client wants to buy, want to sell that. Well, the pit is essentially the matching engine of a data center. The runner is essentially the connectivity of that same data center. And that's really the services and how it transposes between old way of doing and a modern way of doing it. Now a data center provides really 4 different functionality. It provides power. And to give you a sense, again, it's all useful context, but we are consuming roughly 1 megawatt of power for the data center that we have at the moment. And that approximately is the equivalent of 1,000 house running. So this is why power consumption is a very important component, because it's such a significant part of this process. The second part is that, obviously, this room is full of computers and computers provide heat. And so therefore, the other key component is the cooling system of a data center to actually cool down the computers that are heating the data center powered in the first place. The third one is the connectivity and then the fourth one is the security, both in terms of the cybersecurity and physical security over the data center. So why did we choose Aruba as a provider of the data center? But the first thing is that Aruba provides a rating 4 data center. And a rating 4 essentially means that every single part of what I just described, whether it is power, cooling, connectivity or security is fully redundant. So we have 2 power access. We have 2 cooling systems. We have generators that are redundant. We have infrastructure that if it fails, it can just be immediately picked up. That's what a rating 4 data center provides us. The second thing is that when we discuss with Aruba, it was very clear that green and ESG was at the center of their ethos and their culture. And I'll talk a little bit later about what does it mean and how they are addressing that. So in terms of why we then did this move, Stephane mentioned this morning that we essentially in a purchase environment, made a decision to move. But there are clearly also some key benefits for us to have another component of our value chain. And here, it's really the understanding of how our clients are using precisely our data center and the connectivity to our matching engine that makes a difference. And with that, I will pass it on to Simon, who will walk us through the impact from a business perspective.

Thank you, Georges. Right. So we'll just spend a few moments talking about the sort of the impacts on the trading business of this data center move, because it is not trivial by any means. And as we've discussed this morning, and Georges just said, we're no longer living in the world of the trading pit and the runner, but we're living in a world where microseconds and nanoseconds are the questions of the profitability for our customers. And so what this means is that location is important and it matters. And so if you look at this very simple map of Europe, this shows where amongst the main regulated markets in Europe and amongst the main MTFs, where physically the volumes are trading place. So these are year-to-date ADV numbers for the main market. This is not the legal booking of the trade, but this is physically where the orders are matched. And so before this data center move, really there was a nexus of data centers, and there still is a very important nexus of data centers in and around the City of London and the South of England. And so what will happen after the data center migration is an extremely big move in where these trades are taking place. And so across this big map, there will be almost EUR 8 billion of average daily value traded for cash equities we'll use as the example here, moving from the U.K., from the South of England to Bergamo are being added to the volumes of the Italian market. So why is this important? In the U.K. today, the 2 markets which are located nearest to the competing MTFs are the LSE and Euronext. So the Euronext market will move away from the U.K., away from the competing MTFs, to Bergamo. And if we look at the map of Europe tomorrow, there will be a bifurcation, we believe, of 2 regions which will manage equities trading in Europe. The U.K., obviously, will remain a very important center for trading in the South of England with the EUR 5 billion being done on the LSEG and EUR 10 million being done on the alternative MTFs. But what will happen is that over EUR 10 billion, as we discussed this morning, will move to Bergamo. And there will be a triangle of geography where Bergamo will have EUR 10 billion, the Frankfurt Exchange has roughly EUR 5 billion of average daily traded. And then the Swiss, which is an important market outside the EU, but not shown here, which has EUR 3 billion a day. So after this move, approximately EUR 15 billion a day will be done physically in the South of England and over EUR 18 billion will be done in the triangle of Frankfurt, Bergamo and Zurich. And so the $1 billion question we're all asking ourselves, what does this mean in concrete terms for the trading business, for market share and for revenues? And so the first frustrating answer here is that there is simply no precedent in recent years for this type of move. But we can say with certainty 2 things. And so the first thing is that if you look at data centers, which tend to be located east of London, so towards Eastern Europe, these markets tend -- and this is empirically proven -- tend to benefit from a very small market share premium compared to the markets which are located near to the competing MTFs in the London region. And so if you look at the Frankfurt market, the Swiss market and even our own Italian market, there was a small market share premium for this. And why is this? This is because the big electronic liquidity providers find it far more difficult to undertake latency arbitrage between the 2 markets. So when the 2 markets are within a few kilometers of each other, there is a certain amount of trading volumes which takes place, which is latency arbitrage from what we used to call high frequency traders and now more -- we call them electronic liquidity providers. And so this type of volume, we're pretty certain will reduce once the Euronext data center moves to Bergamo. And so we roughly expect -- what we can give is orders of magnitude and a direction. But in terms of market share, looking at the empirical evidence of our peers and our own Italian market, directionally, probably a small uptick in market share from this phenomenon. And then the second thing we know is that the dynamics of liquidity and the order book behavior will doubtless adjust to the location. And it's really not -- we can take questions off-line, and it's far too technical for today, but the way the big owners of the big smart auto routers, so the big Tier 1 investment banks, tend to be located in the U.K. The way they send their orders to the more distant Euronext market now will change. And so we're in the process of studying in great detail the dynamics of the Italian market, and one example we see today is that the Italian market tends to have a bit bigger trade sizes for passive orders when they're sent to the Italian market compared to U.K. markets. And this is because there's a slightly longer latency between the bank server -- the bank server located in London to reach Bergamo. And then to compensate for the certainty of execution, they tend to send bigger orders, so they make sure they get filled once they're in Italy. So there will be some small adjustments in the nature of the liquidity of the Euronext market once it moves. And this is why there's a small degree of uncertainty around the real microstructure impact of this. But directionally, we think this is a pretty good move for the liquidity of the combined Euronext and Borsa markets. And please don't forget that on top of this, the prime determinant of market quality and market behavior are the obligations and the pricing structures we put in place for our liquidity partners and for our customers. So there will be some small adjustments commercially, which will probably far outweigh any of these latency issues. But there will be a change to our markets, which we see as directionally slightly positive. If we're just to move to the next slide, and we'll discuss in high-level terms the commercials of this new business for Euronext. And so as we spoke about this morning, internalizing the control of our own data center and having sovereignty over the policies to do with our data center will create a sustainable, recurrent and relatively non-volume-correlated and material source of new revenues for Euronext. So just as we apply to the trading businesses, here, we have applied a classical segmented approach to the data center pricing policy. And the big difference here in pricing was between customers who believe that, for them, latency is important, will pay premium prices because they will be co-located in the data center. And whereas customers for whom latency is less important who wish to access the data center from outside or even beyond the Italian region, will pay relatively less. But in concrete terms, what are we charging here? So this is basically a very material business in its own right. In very simple terms -- I'm not an IT person, so Georges, maybe you can provide some color here -- but we're charging space. So each time a customer wishes to co-locate their server next to the core matching engine, they pay physically for the space in the data center. And they also pay for the power consumed by that data center. And they can go up to 18 kilowatts of power. And maybe, Georges, you were telling me earlier what the equivalent of 18 kilowatts is for the layperson like myself.

It's about 36 servers.

Yes. So it's pretty heavy power consumption, which is why the ESG credentials were so important to us. We also charge for the links, and again, this is very technical, the links between co-located servers and for connecting to the external world. And most exciting here as well, we're also charging for roof space. And so for the most latency-sensitive customers, they wish not to access through the latest and fastest land lines, the fiber optic networks and so on. They're actually looking at placing microwaves in certain lines across Europe to have the fastest access to the data center. And renting the roof space is also a material source of revenues for us, so they can put their microwaves on top and be fast. And of course, we operate Smart Hands in the data center in various add-on services. And so all of this makes us a relatively high consumer of power. And so now, I'll hand over to Georges, who will maybe talk about a bit more in detail about the ESG credentials of this data center.

Thank you, Simon. So again, I mean, we started at the time assessing our various data center across Europe. And the conversation that we had with Aruba were simply quite different in terms of their value offering over what we had from other data centers. To give you a little bit of an idea of how Aruba is looking at its ESG requirements. So the Aruba CEO -- essentially focuses on ESG and its power consumption, and matches its power consumption with hydraulic power and power generated by photovoltaic cells. And essentially, every time that Aruba grows its footprint, it aims to buy an equivalent typically hydroelectric plant to match its energy demand. Now we don't know any other data center that actually does that. And so therefore, this is why we are very proud to be partnering with Aruba because we really believe that essentially, as a result of this move, we are powering of trading of 25% of the European equity with river and the sun. And that's a very powerful statement for you as investors as well as for our clients. Because obviously, we benefit from our own consumption, but we allow our clients to benefit from exactly the same source of energy, and that's important also to them. If I go to the next page and the time line. So we started the implementation process in June, where essentially Aruba started the build-out of the room that we are in. We then started to install our hardware from the month of the end of June. And we are now inviting customers to join us as of this month to install their own hardware, with the intent of clients starting to test this process from the month of January and then delivering a go-live on the 6th of June. So how well is that going? Well, the answer is that for the moment, we are on track. I'm going to preempt a question because I know it's going to come. What is the impact of the supply chain on the deliverable of this data center? This is a question that we ask ourselves when we started this program. The supply chain challenges are not new. And so when we started the program in the month of March, April, we already preempted this discussion. And were very careful to, on one side, understanding what was our own requirement in terms of hardware. And we had active engagement with all of our suppliers to make sure that we had very clear time line. And at the moment, we are actively and sometimes daily call with our suppliers. And we have had no issues in terms of our supply chain in terms of delivering our own data center. So the second question that I'm preempting is what is the impact on our clients who had exactly the same requirements. Well, the same conversation that we had in April with ourselves, we had with our clients. And we literally, at every conversation that we were providing or every communication that we were giving, we were reiterating to our clients the need to ensure a as quick as possible ordering of the hardware. And we track this very closely. It's one of the metrics that we track with our clients to make sure that those clients are actually delivering their hardware to us well in advance of the requirements for our overall time line. And at this point in time, we have no client that have informed us of any concern in their own supply chain to deliver this program. So if I go now on to the second part of the conversation, which is the Optiq migration. So you've all heard about Optiq. Optiq was delivered 2 to 3 years ago. It was a very significant investment for Euronext. And it is really the epitome, I would say, of how we describe a modern technology platform. It is completely scalable, and we saw that last year when we had the volumes as a result of COVID and we had almost a 10x increase in volume on some of the days, and we had no issue in terms of our latency. We already provide a certain amount of our infrastructure in terms of full redundancy and full availability of our platform in terms of failures. We implemented a very significant amount of enhancement to deliver change at rapid pace. And I would say that as we integrate Borsa, this ability to deliver change with a significant pace is a key component of the success for us to deliver the Optiq migration on time. Now obviously, we are best in class latency. We're at 15 microsecond. But it's also, I would say, this single liquidity pool and the single technology platform that makes a huge difference. Now we just finished the implementation of Oslo last November. We did Ireland a couple of years before. And now I will let Simon describe to you what the business impact of those migrations were for us and our clients.

Thank you, Georges. So as Georges said, we have some -- a couple of nice examples of integrating markets onto the Optiq platform and the Euronext family in recent years. And although these smart markets are certainly smaller than the Italian market, they give an indication, I think, of the direction of travel. And so what happens when a market joins the Euronext market is that the members of the joining market virtually automatically have access to all the instruments traded on the rest of the Euronext markets. And so when Dublin and Oslo members joined the Euronext family, they had vastly facilitated access to all the other markets of Euronext and vice versa. And so this phenomenon of removing and reducing -- sorry, removing these frictional costs of trading, of reducing the access costs for smaller markets, really, really pays dividends. And there are a few examples of here where this has been demonstrated. And so first of all, in both of these cases, the membership of the Oslo Exchange went up by almost 1/4 and the membership of the Dublin market was doubled. And so this is because these -- they're smaller markets, but the costs versus the size of the market was often not really worth it for even the large investment banks trading on these markets, so they went in directly, so was a massive expansion in both cases of memberships. What this meant in many cases was that the liquidity in the order book was enhanced. And here, in the Dublin market, we have some really nice concrete empirical examples of the power of the single order book. And so before the migration of the Dublin market to Euronext, the 3 big Irish blue chips were traded -- still are -- traded on the LSE in a sterling line and on the Dublin market pre-Euronext in a euro line. And the point of price formation for these 3 big, so it's CRH, Ryanair and Smurfit, the price formation was occurring in London in sterling, and being mirrored on the Irish market in euros. And now if we look at those statistics, so typically, those 30%, 40% being on Dublin and 60%, 70% being done on the London Stock Exchange. And so those 3 Irish blue chips joined the Euronext market. Some of the big electronic liquidity providers and the big U.S. and Tier 1 investment banks started to trade directly those Irish blue chips. And today, a couple of years later, we see simply that the liquidity has shifted. And so this has been very much evidenced by the recent story you all have seen in the press about Ryanair considering even delisting from the LSE because 75% of the liquidity today takes place on Euronext Dublin. And so these are very nice examples of where liquidity shifts and the power of the single order book. But above all, and we're not going to disclose any numbers on this, so Aurélie, tell me off if I say anything I shouldn't. But above all, when we integrate these markets, we can apply the same segmented fee structure or the same discipline in segmenting fees on these markets where before, they tend to have very simple fee structures. And to say it resulted in significant revenue uplift for these markets is probably an understatement. So we will see some of that, obviously, in the Italian market. Very quickly, so what does this mean for the Italian market? It's simply the reverse of what I've said, but either on a larger scale. And so the Italian market, when we're integrating the technology and the functionality, we're really trying to take the best of both worlds. And Georges mentioned earlier this morning about how in the derivatives market, for example, we really see a functional richness in the Italian market from which Euronext can benefit. In terms of membership, so we have almost -- we have 199 members across the 2 markets and all asset classes. But it's quite striking that only 25% of those members are cross members, have -- and so you can see the beginnings of the benefits of the cross-selling, of having local retail specialists in Italy connecting directly to the retail services we offer on the rest of Euronext to benefit from the best of book offers and so on. We have big electronic liquidity providers sitting in London saying, I would love to trade more in Italy, okay? So all that kind of liquidity dynamic will be unlocked once we go through the migration. And now Georges, I think we'll go through some practical time lines before we have questions.

Thanks for that, Simon. So in terms of time line, as you can see here, the dates are a little bit more high level because we are some 18 months, I would say, before a full migration. But we spent a lot of time with our Italian colleagues over the past 6 months or 9 months in terms of understanding what were the features that we wanted to keep and retain with the Italian market. And the answer is that we will retain the majority of those features, obviously pending regulatory approval, in terms of benefit to the whole Euronext ecosystem. And that's, I would say, a really important point for us, which is that the beauty of Euronext is that we don't operate individual markets. We operate a single liquidity pool, and that means that we have harmonized rules and harmonized features across all of our markets. And that is really the strength of the market. And therefore, in our conversation with our Italian colleagues, it was very clear that, for us, we want to get the best of both world. We have a mature G7 vibrant ecosystem in Italy, we want to get the best of that. But we equally have a vibrant, successful Euronext existing market, and we still want to retain the best functionality that exists there. We started the process of building the functionalities. And we initially focused, I would say, on some of the prerequisite that, for instance, building regulatory reporting, building connectivity to the clearing houses. These are all aspects that we will have to do in any cases, regardless of the features. But we'll continue to do that, talking to clients in the coming months in terms of our exact features and obviously, again, pending regulatory approval. We expect that we will deliver the first functionality in Q4 of next year. And then the final production go live being in H1 of 2023. We just wanted to highlight that, obviously, we have a TSA, which is our transitional service agreement, which is that LSE currently provides us the service of the Millennium Exchange. And that exchange, that service agreement will end in October of 2023. So with that, we'll open up to questions on both the data center and the Optiq ecosystem.

So we got a question from Arnaud Giblat from Exane. Even the larger deal size in trade in Italy also to do with fees being charged on a number of trades rather than value traded?

That's definitely part of the equation. It's a mixture of several things, but we're able to isolate the flows which are coming from -- the passive flows coming from the bigger Tier 1 [ smatheluges ] from the U.K. to be able to back up what I've said. But yes, the fee structure is charging in euros and not value traded part of the story. Yes.

It's Martin Price from Jefferies. Just a quick question on your comment that you expect that applying a segmented fee structure to the market in Italy to support uplift in revenue capture. Just sort of trying to square that with the comment earlier that you'd expect revenue capture for the group overall to moderate from current levels. Any thoughts on that would be helpful.

Yes. So I think from an overall level, we're pretty much reaching the limit in terms of what we can extract in terms of overall, the Euronext basis point on cash equities. We've got some strong tailwinds on the yield, especially from the smaller trade sizes across the board over the last couple of years. We'll be making some pricing adjustments next year, especially for the big Tier 1 investment banks. But what we see in the Italian market is that there is not a -- if you look at the Euronext fee grid, which I'm sure you have, sometimes, I accept from an external perspective, it can look very strange. You see lots of boxes. But behind each of those boxes is a customer discussion. There was a discussion with a particular segment of customers where each time we try and optimize the price volume elasticity with that group of customers. And simply put, those types of techniques today are not applied to the Borsa Italiana fee grid. You can see yourself it's a very simple classic sliding scale. No differentiation for electronic liquidity providers, retail flow, proprietary trading flow, none of the indirect proprietary trading flow schemes we have, I could go on and on. But I can't go into details, but if you look at the richness of the flow coming through the Italian market, we've looked at the numbers, and we think without getting into trouble we all believe that there's some interesting work to be done on that market.

Great. And then maybe just a follow-up on sort of structural changes you're seeing in the market as more flow skews towards the closing auction. Do you see a sort of tailwind there as that trend continues? And do you expect to monetize that?

It really has probably flattened off over the last year or so. I think we went to this phase where closing auctions on Euronext were typically of 20%, 25%, and now they're over 30% of the overall volumes on the trading day. That's really flattened off over the last couple of years, and especially since COVID. So as you know this all is driven by the rise in passive management, the redemptions and creations of ETFs at the close and so on. But also because the buy side, a lot of them, told us we see the continuous trading session is quite a confusing space to navigate these days with all the options proposed by the brokers. And really, the value of the closing auction efficiency, the beauty of the closing auction as a price formation point is crazy. Within 5 minutes, you have an accumulate -- or 3 minutes on some markets, you have an accumulation period. And then there's an uncross and boom on average, the average trade size is 10x the continuous session. So yes, you're talking 100,000, 150,000 in -- to execute in one go. So that has been slowly more and more appreciated by the buy side. We look at this very, very, very carefully. We are very much aware, as you can imagine, of the attention this has attracted, of the -- our competitors naturally are getting very interested in this space. And we take these threats very, very seriously. But this is a really seriously difficult nut to crack, this point of single price formation. The issuers don't want it. The buy side don't want it. And where we see some innovation occurring, it's really at the margins. Turquoise recently launched their trading-at-last functionality. We offer that already. It's really difficult to try and differentiate in this space. And every single one of those competing initiatives relies on importing the price formation, the prices from the primary market into some kind of crossing mechanism within the alternative offer. So we're not complacent one bit. And we -- without going to details, there are certain things up our sleeves we can do if ever the threat got more serious. But today, it's a pretty -- as you can imagine, a beneficial business to be in as a market operator.

So I got a follow-up from Arnaud Giblat. You seem to imply that pricing model will align in Italy, this which would be a fee hike for clients. Have you had feedback from your clients on this?

Can you repeat the question, sorry there...

You seem to imply that the pricing model will align in Italy, which would be a fee hike for your clients. Have you had feedback from them on that?

All this will be done post migration in 2024. We are very committed, as I said earlier, to maintain the diversity of the Italian order book, and we will do whatever it takes to maintain that diversity of the Italian order book and the quality in terms of order execution, it gives it to its customers. We can go. Thank you for your patience.