2010 SETTING THE SCENE
2010 was a watershed year in the development of European exchange business development. Until that date, the business strategies of each exchange were broadly consistent:
- Merge with peers to compete with NYSE and NASDAQ which were making inroads into Europe
- Focus on core businesses, trading and listings (IPO)
- Build technology in-house, without creating a business around it, like NYSE Technology and OMX were in the process of doing
- Treat information services as a Cinderella business which brought in nice to have revenues
This Presentation Analyses a Decade of Divergence
There was 1 major event and 1 factor which transformed each exchange’s approach to the future:
- The Global Financial Crisis (GFC), which encouraged exchanges to seek stable revenue flows to augment the far more volatile transaction and IPO fees they had come to rely upon
- A dearth of exchange takeover candidates. With few exceptions, primarily in under-developed Eastern Europe, little left to buy
In hindsight we observe that each exchange’s strategies for the 2010s was based on the cards held in their hands.
• Deutsche Börse, primarily an equity exchange with a clearing house, but partnered with SIX for derivatives and indices
• Euronext, already a conglomeration of exchanges but key ancillary information services and tech separate run from New York
• London Stock Exchange, trading venues but already exposed to value added information services via FTSE, buying out Pearson in 2011
• NASDAQ OMX, subsidiaries of NASDAQ, Nordic Focus, and offering trading solutions popular with other exchanges
• SIX Group, single exchange owning a market data vendor competing with Bloomberg and Thomson Reuters plus a payments business
These were not the only deals on the table over the decade, there were some significant failures:
• In 2011 the London Stock Exchange aborted a US3.7 Billion takeover of TMX in the face of opposition from the local Canadian Bank led Maple Leaf Consortium.
• Subsequently in 2017 the EU nixed yet another attempt by Deutsche Börse to take over the LSE in a US$14 Billion deal.
• While in 2019 HKEx’s crazy, ill-considered, US$40 Billion for the LSE, with a commitment to dump the Refinitv deal, got the ending it deserved, read more at www.marketdata.guru/2019/09/16/hkexs-indecent-proposal-lse-the-prom-queen-exchange •
The LSE, forever the Bridesmaid catching the bouquet, but never quite tying the knot, does show why the exchange attracts suitors.
In revenue terms, the standout statistics are that the London Stock Exchange has outperformed other European exchanges by a wide margin, the LSE is also the exchange that has most heavily invested indices, analytics and information services, culminating in the ‘purchase’ of Refinitiv.
While on the other extreme, Euronext has expanded horizontally, but not vertically.
In a territory v data strategy scenario, consolidating ‘sticky’ data services is proving to be the more effective option. Reliance upon traditional non-value added price data feeds with transaction and IPO fees only, or not investing in the information services business at all, à la SIX Financial (Telekurs) does not provide the revenue returns of an information led strategy.
TEN YEARS ON
Financial markets are far more data centric than they were 10 years ago. Trading in liquid markets has progressively automated by leveraging multiple data inputs into complex algorithms built around analytics and models which trigger successive trading events. Passive funds now predominate, which along with ETFs indices must have index benchmarks. Data now drives markets.
The combination of this growth in analytical and index based trading naturally gives an edge to any business, not only exchanges but any investment service company that delivers these tools. In Europe, only the LSE identified the trend and then proceeded to develop a fully fledged strategy around this.
• Overall exchange revenues grew 74% with the LSE between 2010 and 2019, but only 38% excluding LSE’s 268% increase
• Information services performed even worse revenues grew 104% with the LSE between 2010 and 2019, but only 33% excluding LSE’s 316% increase
The other European exchanges groups are also now very different business creatures to the ones of 2010, more diverse in service offerings, but are yet to truly embrace data’s role in the investment process and harness it to their information businesses:
• Deutsche Börse, which started the decade with 45% revenue share, dropping to 36% has belatedly established a new business unit, partnering with investor, General Atlantic, called ‘Qontigo’ (What is a Qontigo??) which combines DAX Indices, STOXX and Axioma’s analytic services. On the surface this mirrors LSE’s FTSE Russell, with STOXX being a recognised European index business
• Euronext continues to broaden its venue based footprint, but even on the data side relationships, such as with Liquid Matrix focus on trading. The information product line up lacks depth, still revolving around primary price data, with no value added analytics, and a suite of indices that do not match STOXX, let alone FTSE Russell
• NASDAQ OMX is a difficult one as the European side of the group concentrates of exchange based services because NASDAQ has a wide portfolio of value added services, products and indices, however, OMX’s trading technology business continues to expand
• SIX’s strategy seems to be not to have a strategy. Shares in the unpolished diamonds of Eurex and STOXX were sold to Deutsche Börse, while one of the most respected market data vendors, Telekurs (SIX Financial) has atrophied
Data trumps territory. Why?
• Financial markets are a data-centric world and the trends are only increasing
• Data has greater ubiquity, with unique abilities to evolve and develop new ways of being used, because Financial Institutions rely upon data and modelling to gain, or at least maintain, a competitive edge
• Information Services will become an even more important revenue stream to the European exchanges throughout the 2020s, and beyond
• Data ingested into data consumers’ systems becomes ‘sticky’ and hard to remove
• Once it becomes ‘sticky’ it generates consistent revenue flows unlike volatile transaction and IPO fees
• While a traditional vanilla data business can only be a positive for an exchange, indeed for all data sources, it will never be “All it can be”
• LSE is leading the race, but could trip up over Refinitiv. While broadly welcomed by the markets it imports a new set of issues, and potentially unbalances the combined group, but if data is truly the way forward, as a ‘fixer-upper’, Refinitiv does represent a logical step in vertical integration
• Deutsche Börse has embarked on building a truly modern age information services business
The one other unspoken element that allows Data to trump territory is ‘Brand’. Data can become a packaged brand, each exchange is itself a brand, but in services outside the confines of traditional trading activities, a name like FTSE Russell, or STOXX plays a role when data consumers seek products and services. These ‘Brands’ provide new global channels for exchanges to build upon
The question exchanges which do not focus, or have lost focus, on information services, might find themselves asking is
“If I don’t have a balanced information business offering value added services, will this eventually limit, or even hurt, core transaction and IPO based fee income?”
Keiren Harris 22/04/2020
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