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Chess Moves: Can Exchange M&A Really Make Shareholders And Customers Happy?

I put CBOE’s John Deters on the spot. “Do you care about your customers, John?” I asked.

“Yes, we care very much about our customers,” he replied.

As chief strategy officer and head of multi-asset class solutions at CBOE Holdings, Deters really does care about them.  But that is a question end users often ask about exchanges today, especially as we look at the M&A activity in the stock, futures and options space.

On a panel I moderated at the IOMA: WFE Conference in Frankfurt, we addressed the issue of consolidation with Deters as the lone exchange representative, Gedon Hertshten, founder and chair of the Hertshten Group which owns a proprietary trading firm (and GH Financials, which operates independently), Peter Lenardos, managing director, RBC Capital Markets and Daniela Peterhoff, partner and global head of market infrastructure at Oliver Wyman.

There are many who look fondly back at the good old days when members ran the exchanges and things like data fees, clearing fees and so on were within their control. But with the advent of publicly traded exchanges, those revenue streams have been maximized for shareholder value. The clearing house, where nobody knew your name, became a major component of the business model. And data, well, it’s become a major source of revenue. And with that, Hertshten says the exchanges are out of balance now with customers.

The Intercontinental Exchange leads the pack in the data area. With its $350 million acquisition of  Superderivatives in November 2014 and then the $5.2 billion mega-purchase of Interactive Data Corp. for $5.2 billion in December 2015, the exchange went all in on the data space. Data and listings at ICE now make up more than 50 percent of revenues with $2.4 billion, compared to $2.1 billion in trading and clearing in 2016.

Nasdaq posted record net revenues of $426 million in 2016, up from $400 million in 2015 in its data products group, and $384 million in 2014.

CME Group’s market data and information services group represents 11 percent of the company’s business and generated $400 million in revenues last year.

When customers see those numbers, many ask that very question: who do you care more about, the customers or your shareholders? The simple answer is both.

The exchange challenge today is about finding growth. The simple toll booth model of charging fees on trades and clearing is only part of the equation now. Data and analytics services are certainly part of it and it may indeed be a source of new business lines. Lenardos and Peterhoff said exchanges may be able to fire up new sources of revenue with services such as collateral management, custody, know your client and other post-trading services. Such value adds may help make customers a little happier and please shareholders.

Meanwhile, the M&A activity in terms of exchanges is intriguing. Here in Frankfurt, Deutsche Boerse is getting on with business without LSE. And LSE is doing the same in London. Both entities could be targets for an acquirer, or potential buyers themselves. The hard part for both scenarios is guessing with whom and in what context? Deutsche Boerse has the odd and infuriating position of being hamstrung by its regulators and politicians who insist on having Frankfurt as the headquarters in any deal. In today’s sophisticated virtual trading world, it must feel absurd to Deutsche Boerse executives that location actually matters.

Scenarios are as wide ranging as the imagination. Could CME Group, which is shutting down its CME Europe, come to Deutsche Boerse and cut a deal? Perhaps. But there’s that weird image of Terry Duffy moving to a new headquarters in Frankfurt. Jeff Sprecher always is in the mood for a deal. Could he fold LSE into ICE Futures Europe? Or might Euronext find a way to make a deal? And for something completely different, there’s the potential for the new NEX Group to make a move into the listed space in a tie up with LSE. Or maybe the empowered CBOE complements it’s number one stock position with the LSE.

There aren’t many big pieces left on the chessboard, but there are still moves to be made. At the end of the day, exchanges have to find a way of making shareholders and customers happy.

 

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Kharouf is CEO of John J. Lothian & Co. and editor-in-chief of John Lothian News (JLN). He edits the John Lothian Newsletter, MarketsWiki and MarketsReformWiki.