The London Stock Exchange has set a provisional date of Sept. 23 to kick off a U.K. securitized derivatives market but several of the biggest warrant houses will not be taking part, according to officials at the firms. The stock exchange had restricted access to automated trading to a group of five: Goldman Sachs, SG Securities, JPMorgan, Citibank and Macquarie Bank, because of limited capacity on its trading system. But, after Citibank and Macquarie pulled out UniCredito stepped up to the plate. Officials at the LSE did not return calls.
Macquarie pulled out because there are still several unresolved issues, such as whether stamp duty will apply to warrants trades. "We think that until these issues are resolved the chances of success will be constrained," said Geoff Austin, equity markets division director at Macquarie in London. Officials at Citibank declined comment.
Johan Groothaert, managing director and head of equity structured products and alternative investments at Deutsche Bank in London, said, "The U.K. warrant market has a zero chance of success." This is because investment-type products, such as certificates, are regulated more harshly than index tracking funds and speculative investments, such as warrants, are taxed more harshly than their spread betting equivalents. "This comes down to a de facto decision that the Financial Services Authority and the Treasury don't want this business to develop in the U.K.," added Groothaert.
However, warrant powerhouses such as SG Securities and Goldman Sachs believe this market has huge long-term potential. Charles Annandale, head of equity derivatives at SG Securities in London, predicted that in the next 18 months to two years volumes could reach 25,000 trades a day, representing some GBP11 billion in annual premium. This would put the U.K. on par with Italy, the third largest warrant market in Europe. In order for the market to succeed, the issuers and brokers are going to have to invest a lot of time and money in educating retail investors, according to Mark Valentine, executive director in the equities division at Goldman Sachs in London. Goldman plans to set up a dedicated Internet site and support the London Stock Exchange in its educational campaign.
