The SWX Swiss Exchange first consolidated operations onto a single integrated electronic trading platform ten years ago. Since then, it has not only emerged as a dynamic medium-sized player, but also as a leader in cross-border partnerships and a technological trendsetter within the exchange industry.

Neutral Switzerland avidly guards its independence. However, this has not stopped the country from positioning itself as one of the world’s preeminent financial intermediaries. The Swiss financial sector can look at a rich tradition dating back to the 13th century, with the first Swiss stock market established in 1850.

Switzerland realized the need to complement its worldwide banking reach with a perfectly oiled, internationally oriented Swiss securities exchange serving a global clientele. The first step toward national consolidation and a bundling of liquidity was carried out in 1993, when the SWX Swiss Exchange, a part of the SWX Group, was created out of the former three securities exchanges, in Zurich, Geneva and Basel.

Since then, the unified exchange has adopted an ambitious strategy, focusing on developing new markets and services, securing a technological edge over its competitors and initiating a far reaching international expansion drive over the past decade – all of which are designed to grow its business and maintain the attractiveness of the Swiss stock market in the face of tough international competition.

 In the meantime, in little more than a decade, the strategy has paid off handsomely. Though ranked 10th worldwide in terms of revenue (CHF 1,213 billion at the end of 2005) and capitalization (CHF 1,237 billion), the exchange has had a global impact far beyond its size.

For one thing, it now rates as one of the world’s most technologically advanced securities exchanges. It was the first to introduce fully automated trading, with automated links to clearing and settlement within the framework of the “Swiss Value Chain,” a partnership of SWX Group, SIS Group and Telekurs Group. This unique system
enables an order to be executed, cleared, paid for and confirmed within the space of two minutes, processing an average of 2.3 million transactions each trading day.

November 2005 marked the launch of Quotematch, a quote-driven subsystem to the SWX platform for trading in more than 6,500 listed securitized derivatives, which has enabled high volume quoting capabilities for market makers. Initially used for warrants and structured products, international bonds will also soon be migrated to Quotematch.

“Thanks to Quotematch and other associated measures, such as high speed Internet based listing mechanisms, we have seen tremendous growth in the listing and trading of warrants and structured products since November 2005,” says Heinrich Henckel, CEO, SWX Swiss Exchange.

SWX has boldly moved forward to form strategic alliances. For one thing, it has entered into a strategic partnership with Deutsche Börse to set up jointly owned Eurex, Europe’s most important futures and options exchange and the world’s largest marketplace for derivatives, which Henckel proudly terms “the most successful example of cross-border cooperation in the exchange industry.” Together with Deutsche Börse and Dow Jones it has also created STOXX, market leading pan-European security and sector stock indices.

Furthermore, SWX fully owns virt-x, the cash market for Swiss Market Index (SMI) shares and European blue chips and the only recognized investment exchange in London besides the LSE. virt-x is the first pan-European
exchange to enable participants to trade in all of Europe’s leading stocks and exchange traded funds. SWX Swiss Exchange is also No. 1 in Europe in life sciences, ahead of the LSE, and has created a specialized index to cater to foreign investors targeting the pharmaceutical sector. In addition, SWX acquired the Bremen Stock Exchange in 2005 to move into Germany’s securitized derivatives market.

SWX Group says it will continue to proactively seek international partnerships “wherever attractive opportunities arise.” One indication that SWX is not slowing down is the recent announcement that it will build on its

Bremen acquisition and team up with Deutsche Börse to set up a European exchange for securitized derivatives, combining their warrant and certificate trading activities in a jointly operated securities exchange. Trading in this high growth segment will initially take place on two separate exchanges in Germany and Switzerland, which by 2009 will be transferred to a common electronic platform.

In line with the Securities Exchange Act in Switzerland, the SWX Swiss Exchange will continue to make its regulatory framework internationally compatible and live up to internationally accepted standards in self-regulation. In this regard, it has set up an EU-compatible segment to facilitate access of Swiss Market Index issuers to the harmonized European capital market. It is also waiting to evaluate the effects of the EU’s Markets in Financial Instruments Directive, which will be introduced in 2007.

However, the exchange will not hesitate to exploit its autonomy to differentiate itself when the EU tends to over-regulate the market. For example, existing EU regulations require Eurobond issuers to use IFRS as the financial reporting standard, whereas SWX accepts other standards from developed economies such as US GAAP and Japanese GAAP.

As they have done for centuries, the Swiss are confident of maintaining their vital role in global financial markets. However, in the future, huge investments will be required to develop more sophisticated, next generation IT-based trading systems to cope with capacity demands. Apart from that, the future strategy of the exchange will have to adapt to possible shifts in the power structure of European exchanges. The announced merger of NYSE and Euronext, which still awaits shareholder approval, could have a major impact on its operations. Much will also depend on whether the main European markets merge in some form, and how they would position themselves in that event.

The challenge: Create an electronic trading platform with the capacity and performance to efficiently trade high volume, quote driven securitized derivative products.

The solution: Partner with OMX to create Quotematch, based on the X-stream platform, to meet the needs for a high speed trading engine initially used for warrants and structured products.

By Clifford Stevens Photo Stefan Walter

MarketView 2006:3