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What drives an exchange merger?

A previous CEO of Deutsche Boerse Group once said to me “You don’t partner with the Number 2 in the market to beat the Number 1 in the market – you partner with the Number 1 in the market to beat everybody”.  So it shouldn’t be a surprise that we’re seeing the operator of the No.2 derivatives exchange in Europe merging with the operator of the No.1 derivatives exchange in Europe.

We’ve also all seen an increasing awareness globally of the importance of clearing and central counterparties for mitigating and managing risks.  That applies to derivatives even more than equities.  And national legislators and market regulators are showing a strong tendency to push for more and more trade-types to be forced into central clearing and for more and more derivatives-types to be forced onto exchanges for trading.  So owning a major derivatives exchange operation and integrated CCP is a clear sweet-spot in the market

Whether it’s for real-time market data, be that pre-trade or post-trade, or for reference data and corporate actions data, having control of all of the data from the larger exchanges across Europe will put the new exchange operator in a unique position at a time when the European Commission is asking the financial markets industry to propose a European Consolidated Tape solution.

And then there’s the IT business – hardware, software, hosting, networks, etc.  Being the one organisation that can offer hardware co-location with the larger European exchanges, and maybe the only organisation allowed to provide access to those exchanges’ trading systems and transparency data, would put any business in a pretty strong market position.

Interesting questions that this it does raise are – how does this fit in with the European Parliament’s MiFID goal of increasing competition between exchanges?  Or will this new structure make EU financial markets even more competitive internationally and more cost-effective for investors?


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