The merger between exchange groups Deutsche Börse and NYSE Euronext would seriously constrain potential new competitors from challenging the power a joint entity would wield in listed derivatives, according to Nasdaq OMX.
Nasdaq OMX, which owns a number of US markets as well as the Nordic exchanges, fired the warning in its response to a second questionnaire sent out by the European Commission's competition division in relation to the DB/NYSE merger. The questionnaire aims to find out how OTC and listed derivatives are currently traded in Europe and the possible impact of a merger between Deutsche Börse's Eurex and NYSE Euronext's Liffe.
“Market entrants will struggle to compete to a significant degree in respect of products currently already offered by Eurex or Liffe because of the stickiness of liquidity in derivatives market,” read the response obtained by theTRADEnews.com.
While the response from Nasdaq OMX noted that Eurex and Liffe offer complementary, rather than competing, products in areas such as long- and short-term interest rate swaps (IRSs), it added that the combined expertise and standing of both derivatives markets would create a substantial barrier to entry. Liffe already has a virtual monopoly on short-term European IRSs and offers long-term IRSs on UK bonds, while Eurex offers long-term IRSs on German, Swiss and Italian bonds.
Nasdaq OMX pointed to the difficulties faced by Turquoise, the multilateral trading facility (MTF) owned by the London Stock Exchange Group (LSEG), in building liquidity for its new derivatives segment.
“Turquoise has been unable to attract any liquidity in products that it did not inherit from its predecessor EDX,” read the response. “The [DB/NYSE] merger would prevent MTFs like Turquoise not only from taking advantage of the small scope for competition on established categories of exchange-traded derivatives (ETDs) but importantly from competition of new categories of ETDs moving onto exchange from OTC.”
Turquoise Derivatives launched on 6 June, offering contracts based on the FTSE 100 index. In addition, Turquoise Derivatives absorbed EDX, the LSEG's existing platform for trading Russian and Norwegian derivatives. However, the MTF has been refused a licence to offer products based on the EURO STOXX index, owned by Eurex.
Copycat products
If competing venues were able to launch new and innovative products or technology offerings, Nasdaq OMX said a merged Eurex and Liffe would simply be able to “suck in liquidity … simply by launching a copycat product”.
Nasdaq OMX's most recent response to the European Commission builds on the feedback it presented during the first round of questionnaires sent to market participants. In its first response, Nasdaq OMX stressed that “allowing one service provider to have 79%-98% market share [in European exchange-traded derivatives means] the other service providers would not have the possibility to compete”.
Nasdaq OMX teamed up with the IntercontinentalExchange in April to launch its own takeover of NYSE Euronext but was forced to abandon its bid after discussions with the Antitrust Division of the US Department of Justice, which had concerns over the domestic monopoly a NYSE/Nasdaq combination would have in US listings.
Deutsche Börse initiated talks to merge with NYSE Euronext in February 2011, in a deal that would create an entity with a market capitalisation of US$9 billion. The EC is expected to report back on its findings on 13 December 2011.