Nasdaq OMX warns of NYSE/DB derivatives monopoly

Global exchange operator Nasdaq OMX has cautioned that the planned merger between Deutsche Börse and NYSE Euronext will create a “monopolist that would be able to dictate the market for years to come” in European exchange-traded derivatives.
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Global exchange operator Nasdaq OMX has cautioned that the planned merger between Deutsche Börse and NYSE Euronext will create a “monopolist that would be able to dictate the market for years to come” in European exchange-traded derivatives.

Nasdaq OMX raised its concerns in response to a European Commission (EC) questionnaire on the impact of the merger issued to market participants on 7 July. Deutsche Börse operates the Frankfurt Stock Exchange, the Xetra International Market multilateral trading facility (MTF), the Eurex derivatives exchange as well as Eurex Clearing and Clearstream, an international central securities depository. NYSE Euronext owns the largest US stock exchange, domestic exchanges in Paris, Belgium, Amsterdam and Lisbon, the London-based Liffe derivatives exchange and SmartPool, a dark MTF.

“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 since they could not run their business with the same level of scalability,” read the Nasdaq OMX note.

According to Nasdaq OMX, the dominant market share that would be held by the combination of NYSE Euronext's and Deutsche Börse's derivatives central counterparties (CCPs) would allow it to offer new derivatives products at little or no cost, providing a substantial barrier for competitors.

Nasdaq OMX also expressed concerns about the ability of other CCPs to compete with the vertically-siloed trading and clearing infrastructure of a combined Deutsche Börse/NYSE Euronext, which would be able to offer collateral and margin offset capabilities.

“The correlation of Eurex Clearing fixed income products with NYSE Liffe Clear fixed income products, correlation of the combined entities' equity indices products and correlation of the combined entities' single stock derivatives would provide possibilities that no other CCP would be able to offer,” read the note.

Nasdaq OMX teamed up with the IntercontinentalExchange in April to launch its own takeover of NYSE Euronext, but was forced to abandoned 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.

Sell-side doubts

Brokers have also expressed their concerns over the deal, with some questioning the benefits that the combined entity would provide to clients. According to NYSE Euronext and Deutsche Börse, a merger would lead to cost synergies of US$798 million, including US$580 in cost savings and US$218 million in new revenue opportunities.

Jan-Michiel Hessels, chairman of NYSE Euronext, has also said that the combined entity would “deliver substantial operational and capital savings for clients, along with product innovation and an enhanced range of technology services and market data solutions that will help clients succeed in the rapidly changing global marketplace”.

A NYSE Euronext spokesperson added that the ability to offer margin offset arrangements within the combined entity's clearing house was considered to be a significant benefit for members.

However, based on meetings with the merger partners, sources at top-tier investment banks said savings had been outlined relating to streamlined market connectivity but not as yet in terms of commitments to lower trading fees across trading platforms.

“Based on the historical behaviour of both exchanges in areas where they have not faced competition, there is evidence to suggest that monopolistic behaviour is a risk,” said the source.

In recent months, NYSE Euronext has raised the fees for its closing auction while Turquoise, the MTF owned by the London Stock Exchange (LSE), was recently refused a licence to offer derivatives products based on the EURO STOXX, the index provider joint-owned by Deutsche Börse and SIX Swiss Exchange. Turquoise is currently discussing its case with European competition authorities.

Earlier this week, the LSE aired its own concerns to the deal in a note sent to the EC. It said that the merger would eliminate competition for derivatives trading and create “insurmountable” barriers to entry for other providers.

The European markets and infrastructure regulation, new legislation that is currently being finalised by the European Parliament and the Council of the European Union, contains a clause that may allow trading venues to licence derivatives from existing markets more easily, although it remains unclear whether this will be adopted in the final text.

While noting the competitive issues raised by the merger in the derivatives space, Andrew Bowley, head of electronic trading product management at Nomura, suggests the combination of NYSE Euronext and Deutsche Börse would not necessarily damage competition in pan-European equities trading.

“In the cash equities space, an ideal situation would be to have fewer pan-European players,” Bowley told “In the cash equity space a combined DB/NYSE would offer a healthy and competitive environment along with the LSE/Turquoise and the potential combination of BATS Europe and Chi-X Europe.”

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 merger proposal received approval from 96% of NYSE Euronext shareholders and 80% of Deutsche Börse shareholders earlier this month. The questionnaire sent to market participants is part of the first phase of the EC's examination into the competitive ramifications of the merger. The EC is due to report it findings on 4 August, at which point it will either give the green light to the deal or announce that a more in-depth review is required. A spokesperson for NYSE Euronext said that the complexity of the deal means it would almost certainly require an in-depth review, which will last for at least 90 days.