Who said August was quiet? It seems to be as busy as ever, with some interesting headlines coming out over the last few weeks. One big headline a week or two ago (that I’m sure everyone saw) was LSE potentially merging with/buying Refinitiv (you can read about it here). From our perch in the industry, I find it interesting for a few reasons.
First, it’s obvious that every exchange player globally now sees the twilight years of execution ahead, and are looking to diversify their businesses. It’s not that there is no money to be made in trading – there is – it’s more that there isn’t a lot of room for expansion (in the traditional sense) and there are limits to the growth potential. The world of execution is already carved up, and the foundations of various competitors are solid and almost untouchable.
It feels to me like all the exchanges are now looking for other ‘marketplace’ opportunities in the industry. Other areas that they can leverage their existing domain expertise against, but don’t have the constraints that exist on the execution side of the business (such as geographical, regulatory, etc.). Look no further than the NASDAQ purchasing Quandl a few months ago. NASDAQ is looking to build the ‘marketplace’ of alternative data, and who better to acquire than the arguable leader in the space. The advantage Quandl has is that unlike a traditional exchange, they have no hard geographic boundaries. They can engage with providers and clients in Canada, the US, UK, China, etc. Nothing is beyond the scope of their potential growth. Also no one ‘owns’ the alternative data marketplace – meaning it’s anyone’s game at this point.
For another example, look at SGX investing in SmartKarma. They’re trying to leverage the partnership to differentiate and empower their listings business, but also extend their reach beyond Asia. It makes complete sense – otherwise they would be limited to the growth in their local market. This way they can strive towards a global strategy.
When I look at the LSE buying Refinitiv, it seems to be the same long term vision with a different strategy. Build out a new marketplace, and look for strategic synergies with their existing marketplace (the traditional exchange business). Refinitiv is an information marketplace. They have a data terminal business, but more importantly, they have a communication network. That communication network represents a social network, which is in its very essence an information marketplace. With the combination of the two, the LSE can expand its footprint well beyond where it is now, but also begin working on a competitive information marketplace to those that are out there already. Why wouldn’t they give every company that lists on the LSE a free Refinitive terminal? Why wouldn’t they give preferential pricing on Refinitiv terminals to brokerages that trade a certain amount of volume on the LSE? Why wouldn’t they put crucial LSE data only on Refinitiv, creating a clear competitive advantage? Cross service subsidization and marketing is nothing new, and certainly not new to the capital markets.
The Exchange industry feels a lot like continental Europe a couple hundred years ago – some very powerful nation states who had essentially carved up Western Europe. However, once one of them started sailing for new lands and new territories, it became a forced opt-in for the rest. It feels that way now with the exchanges. The development and electronification of execution has largely been achieved. Starting with the advent of the FIX protocol in 1992 (it’s actually an interesting quick history, that you can read here), up to this day, we’ve seen massive advancement and change. Now, they are setting their sights on new opportunities to build out the next generation of marketplaces, be that social, alternative data, information, or a combination thereof.
My gut says this starts a race that pulls in all the global exchange/infrastructure players: ICE/NYSE/SGX and others. They all need to decide what new markets they are going after (and what new marketplaces they want to build) and how they are going to enter them (build vs. buy). All those marketplaces will interact with and engage with their existing businesses in different ways, and I look forward to seeing the pricing model shake up. It’s hard to remember that the ‘maker/taker’ model only came about when trading went electronic – we’ll see what new pricing structures emerge from this wave of innovation. While the old world of trading definitely feels like it’s been settled over the last 25+ years, there are a number of new worlds opening – largely on the ‘communication/client coverage/knowledge management/data management’ side of the business – and they are all up for grabs.
Exciting times ahead!
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