5. REPORT OF THE MANAGING BOARD FOR THE YEAR 2003
5.2. EURONEXT ACTIVITIES

5.2.1. Cash Trading and Listing
KEY POINTS

  • NSC, single trading platform for Euronext cash markets from successful connection of Lisbon
  • Single orderbook for Euronext cash markets
  • Harmonised fees structure effective January 2004
  • Market capitalisation of 1,392 companies reached €1,646 billion up to 11.4% on 2002
  • 38 companies joined Euronext’s listing in 2003
  • Implementation of ISIN codes
  • Availability of NSC trading platform platform stood at 99.9%

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    FINANCIAL REVIEW: THE BUSINESS IN 2003
  • Number of transactions on NSC rose to 150 million trades, up 8.3% on 2002, Euronext’s cash market share in Europe further enhanced
  • Cash revenues resilient at €187.5 million (-1.6%) despite uncertain economic conditions and listing revenues down to €30.6 million (-20%)
  • Cost control: drop in operational expenses (-5.5%)


    • Cash trading and listing revenues (excluding Clearnet and IS retrocessions) decreased by 4.7% at €218.1 million in 2003 from €229 million.

    Listing revenues were down to €30.7 million, - 20.2% on 2002 (€38.4 million). This was due to two main factors:
    - the drop of 8% in annual fees due to the delisting of companies (from 1,484 companies in December 2002 to 1,392 companies in December 2003);
    - the drop of 34% in admissions (€-1.1 million impact) induced by the bearish economic environment.

    Cash trading revenues stood in line with 2002 level at €187.5 million, despite an 11% increase in the volume of trades (which indeed reached 150 million for the whole year). This mainly results from the drop in average fees related to the digressive fee structure.

    Operational expenses decreased by 5.5% is explained by IT synergy and lower staff expenses.

    EBITA went down to €102.7 million. As a consequence of listing income trend together with the drop in Clearnet retrocessions, EBITA margin amounted to 43.8% for cash trading and 16.9% for listing in 2003.

    CASH TRADING AND LISTING: DELIVERING THE BIGGEST LIQUIDITY POOL IN EUROPE

    Euronext’s strategic objective is to strengthen its role as premier consolidator of European capital markets. With the unification of the central order book of Amsterdam, Brussels, Lisbon and Paris, Euronext provides customers with an integrated cash market.

    5.2.1.1. Introduction to the business
    Euronext Cash trading and Listing Business Unit manages the listing and trading of all cash instruments (stocks, bonds and structured products such as warrants, certificates and exchange traded funds). Euronext's focus is to provide open access to all parties that wish to raise capital in Europe.
    Euronext organises fair, transparent and orderly driven markets.
    As far as the secondary market (trading activity) is concerned, Euronext's core mission is to ensure that NSC, Euronext's electronic trading platform, provides the highest level of processing efficiency. This will further increase the liquidity on Euronext's markets.


    5.2.1.2. Listing
    Euronext's marketplaces currently have their own listing rules as they are not yet incorporated into the harmonised rule book. Listing applicants are therefore free to choose their point of entry to the market (Amsterdam, Brussels, Lisbon or Paris). If admitted by the relevant regulatory authorities, the applicant company will then be positioned on the appropriate Euronext segment and choose a method of trading according to the level of liquidity of its shares.

    Business overview
    Some 38 companies joined Euronext in 2003:
  • 21 companies listed on Euronext Paris in 2003, of which 3 on the Premier Marché, 4 on the Second Marché and 14 on the Marché Libre;
  • 15 companies applied for a listing on Euronext Brussels with 4 on the Nouveau Marché and 11 on the Premier Marché. These 15 companies were formerly listed on Nasdaq Europe;
  • Euronext Amsterdam welcomed the new listing of 2 companies.

    As at 31st December 2003, 1,392 companies were listed on Euronext (of which 1,047 domestic and 345 foreign).

    In 2003, 22 companies joined Euronext segments. As a result, NextEconomy included 116 companies and NextPrime 150 companies at year-end.

    Listing organisation and development
    Once a security is admitted to listing, Euronext manages all the corporate events related to the given listed company as well as notices for the market. These include the issue of new securities giving direct or indirect rights to capital, public offers, exchange or squeeze-out offers and trading suspensions that can occur pending important information that could have a significant impact on the issuer's share price.

    Euronext provides services for issuers and investors and promotes its markets via various workshops, events and other market initiatives through partnerships and sponsoring.

    The Euronext list comprises all securities listed in Belgium, France, the Netherlands and Portugal. Inclusion in the Euronext list does not entail any regulatory requirements on top of those set by the local regulatory body.

    Listed companies benefit from Euronext's single cross-border market as well as local knowledge and expertise.

    Euronext list's organisation is based on four factors:
    (i) Sector classification
    Every company listed on Euronext is categorised on the basis of the FTSE classification system, an international standard that covers more than 46,000 companies around the world and places issuers with similar areas of activity in the same sectors.

    (ii) Liquidity
    Liquidity is related to the method of trading - continuous trading or auctions (see § 5.2.1.3).

    (iii) Inclusion in the NextEconomy and NextPrime market segments
    NextPrime represents the traditional economic sector and NextEconomy is the new technology sector. These segments offer listed companies the possibility to increase their visibility, regardless of their size.

    (iv) Positioning within the indices
    In order to better structure its list, Euronext has retained the national indices compiled by its predecessors, in view of their importance for local investors, and has also created and maintained indices specifically for the Euronext list (Euronext 100® and Next 150®, NextEconomy and NextPrime indices).

    Euronext's indices are based on a range of factors, including market capitalisation, economic sector and market segment.
    The indices are compiled by the Group and marketed by the subsidiary Euronext Indices B.V.

    Outlook
    Positive signals of a recovery in IPOs were seen from the start of the year. The first IPO of the year was that of the French Internet provider Iliad on the Premier Marché of Euronext Paris.
    The situation further strengthened with the IPO of the Belgian national telecom company Belgacom on Euronext Brussels on 22nd March 2004. This was the largest IPO in Europe for three years, helping to ensure that flotations on Euronext raised the largest amount of funds in Europe during the first quarter of 2004.

    Under this framework, Euronext is working to simplify its market segmentation to further enhance visibility and competitiveness of the companies listing.


    5.2.1.3. Cash trading
    Euronext market model
    The Euronext market is based on the following features:
  • Order-driven market with an electronic central order book
  • Execution of different types of orders
  • Automatic order matching
  • Full anonymity for orders and trades

    Liquidity
    Liquidity is related to the method of trading, which is based on two mechanisms: continuous trading and auctions.
    The most liquid securities are traded continuously during market sessions. Less liquid securities can be traded continuously with the aid of a liquidity provider, or exclusively in auctions. Liquidity providers (LP) are traders for their own account that have undertaken, with the approval of the relevant market operator, to improve liquidity in a particular security. It is quite simple to change the trading method used for a particular security. For example, if an issuer wants its security to switch from auction trading to continuous trading it can arrange this by appointing a liquidity provider to support its security.

    To adapt to the changing financial environment, new requirements were set up for LPs in April 2003, which concern all segments.

    Business overview
    In 2003, Euronext completed the technical migration of cash markets to a single trading platform, NSC. This resulted in increased numbers of transactions (up 8.3% in 2003), due in part to cross-border trades, improved profitability and improved liquidity. The implementation of a single system in 2001 went on proving its efficiency in opening up the individual marketplaces to each other's members, as illustrated in the table below. A similar positive impact is expected from the migration of Euronext Lisbon at the end of 2003.
    • Business processes were also improved, aiming at:
  • Reducing the number of legacy systems and databases, concentrating resources in certain locations (market operations in Paris) and enhancing the sales force in every location.
  • Improving the business proposition for customers - on the technical side (adoption of the ISIN codes in Paris) or on the commercial side (design of a fee structure for the four Cash business centres or definition of a best practice concerning the provision of quar terly reports for listed companies).
  • Strengthening its relationship with customers by being closer to customers across Europe through offices in London and Frankfurt and through a dedicated extranet for the members.
  • Enhancing its continuous dialogue with the regulators at domestic and European level - particularly at a time of substantial modifications to trading mechanisms and the implementation of the new Directive on financial instruments markets (formerly investment Services Directive 2).

    • Membership overview

    At the end of 2003, a total of 277 members were active on Euronext cash markets:
  • 58 Brokers,
  • 23 Dealers,
  • 196 Brokers/Dealers.

    This includes the 19 Portuguese members who started trading directly on Euronext central order book further to the successful connection of Euronext Lisbon to NSC.

    • Euronext is actively pursuing product development of trackers (ETFs) on new indices such as the FTSEurofirst indices, the EuroMTS (EMTX) index (bond index) and Diamonds® indexes. These products will meet the needs of Euronext's customers who invest in liquid benchmark instruments.

    Products performance and development
    NextTrack Exchange Traded Funds segment
    The volume of trades were up to 16.5% to 422,580 transactions on 2002. However the turnover decreased by 44 % to €72 million for two main reasons:
  • large volumes on trackers are done over the counter;
  • this segment has evolved from a market of arbitrageurs and short-term investors to one with more long-term investor positions. As a result, the increase in the asset under management has not been followed on the secondary market.

    There was strong growth in the tracker market in 2003 with the primary market up by 153% (Diamonds® included) and 53% (without Diamonds®). The volume of trading was up 17% with more activity from retail investors and small size asset managers.

    During 2003, Euronext listed American Stock Exchange's Diamonds®, one of the world's most popular Exchange Traded Funds and first trackers on the FTSEurofirst 80 index.

    NextWarrants
    The warrants segment of Euronext increased slightly in 2003 with a turnover at €4.9 billion, up 3% on 2002 despite difficult market conditions.

    Technical enhancements have positioned NextWarrants at the forefront of all warrants electronic markets.

    Bond indices
    Euronext has a strong relationship with MTS Group, which operates the leading electronic European Bond trading platform. Euronext and MTS France have clearing agreements which include MTS SpA, the Italian arm of the MTS Group. The organisations forged an alliance in the bond index field by setting up a joint-venture, MTSNext.

    MTSNext was created in May 2003 and licenses bond index based on the prices traded on the MTS platforms (see § 5.3.5).

    Status of integration process
    Completion of the migration of cash markets on NSC system
    NSC is a state-of-the-art electronic platform that supports the trading activity of Euronext cash markets. Licensed by AtosEuronext, it is used by some 14 exchanges around the world, making it the most widely used system of its kind (see § 5.3.3).

    The successful migration of Lisbon cash markets on to the central order book in November 2003 gave Euronext customers direct access to the complete listings of Amsterdam, Brussels, Lisbon and Paris cash markets on a single platform.

    Implementation of ISIN codes
    In June 2003, ISIN codes (the quotation standard used to identify listed instruments), which were already used in Belgium, the Netherlands and several other international markets, were extended to all Euronext products listed on the NSC system.

    Added value for customers
    In 2003, the centralisation of the technical support Euronext provides to its customers (for connectivity, systems supervision and incidents management) in Paris further enhanced clients' support.

    In addition, local cash advisory committees were set up to increase the cooperation contact with the Group's customers.
    These groups meet 3 times a year in all the Group's locations to discuss new developments with members and customers and address any concerns.

    Associated Trading Partnership (ATP)
    A new status allows the ATP to maintain its commercial relationship with Euronext, reducing its trading, IT and connectivity costs.

    • Fee structure for 2004

    In addition to providing customers with a single trading platform, Euronext implemented a standard harmonised fee structure for all members, regardless of location.
    There are five different tariff packages which are designed for different trading activities with a special tariff for proprietary and arbitrage trading. A new member status, Associated Trading Partnership, was designed for small volume members. On average, the packages should reduce fees for customers by up to 11%.

    Outlook
    Through customer focus, developing innovative products and new partnerships, we intend to further integrate Europe's fragmented capital markets.