Frantic trading as Europe struggles with its debt crisis is providing a brief shot in the arm for stock exchanges, but won't immunize their hefty valuations from fierce competition when the volumes abate.
A rash of orders as panicky trading hit three-year highs will have provided a solid fee flow for exchanges, in stark contrast to investment banks, whose far riskier trading floors may get burned when markets are choppy.
But that does not mean stock exchanges are necessarily a better investment, as volumes are likely to fall back, exposing the real pressure on their business models.
I don't expect trading volume growth to return to 2005-2007 levels, so my outlook for the exchanges is fairly cautious, said Richard Perrott, an analyst at Berenberg Bank.
European shares worth 1.12 trillion euros ($1.57 trillion)were traded in August, Thomson Reuters data shows, making it the busiest month since the fallout from the collapse of U.S. investment bank Lehman Brothers, when 1.25 trillion euros traded in October 2008.
The average monthly turnover in 2010 was 786.2 billion euros, 30 percent short of August's showing.
With about a third of September's trading days complete and 313 billion euros of business already executed, the dial is still set to feast, not famine, but regression to the mean could put pressure on exchanges' valuations.
Their shares are trading at 10.5 times estimated earnings, compared with a multiple of 7.8 for banks, and have held up relatively well in the past 12 months, even as operators cut fees to stem the tide of business leaving for cheaper rivals.
LSE shares are flat for the year, while NYSE Euronext is off 16 percent, and Deutsche Boerse 21 percent. That compares with a drop of almost 40 percent for banks, their main clients, as measured by the European banking sector index.
But with competition showing no signs of cooling in a market characterized by low margins and unpredictable volumes, the region's stock markets and the cut-price start-ups that are challenging them look set for a rough ride.
BIG IS BEAUTIFUL
Brokers say a fall in trading activity will particularly hit trading venues that have struggled to attract decent market share, and those without financially strong owners.
Many (start-ups) wrote their business plans based on the volumes we saw in August, and they will be wishing the market stays at those levels, said Robert Boardman, chief executive of broker ITG Europe.
But the sober answer is, it's unlikely to happen.
Europe has seen the rise of a spate of new trading venues known as multi-lateral trading facilities (MTF), which trade shares listed on other exchanges, after rules to increase competition were introduced in 2007.
Banks such as Goldman Sachs, Nomura and UBS all own an MTF, while Chi-X is owned by a consortium. Some MTFs, such as the LSE's Turquoise, are in the hands of exchanges, while others are independent, such as Pipeline or QuoteMTF.
It is not hard to start up an MTF, but it is hard to grow them and make them profitable. This makes it difficult for start-up MTFs without strong owners, said Richard Semark, head of execution sales at UBS.
This has opened the prospect of consolidation among smaller European trading venues after a period of failed mergers between the world's largest exchange groups.
The LSE's bid to merge with Canada's TMX Group was blocked by Canadian shareholders, while the Singapore Exchange's takeover of Australian bourse ASX collapsed amid political domestic opposition.
Deutsche Boerse's bid for NYSE Euronext is the only deal still on the table. Sources told Reuters last week that the European Union would impose serious anti-trust restrictions on the $9 billion deal.
($1 = 0.712 Euros)
(Editing by Will Waterman)