Survival of the fittest

Following an acquisition-littered few years, Annabel Smith explores the new role of trading venues and the need for a diversified toolbox in order to compete in an increasingly complex marketplace.

The role trading venues play within the markets today is virtually unrecognisable when compared to that which they played in past decades. The days of simply providing platforms to facilitate the process of buying and selling are over. 

An influx of new capabilities unveiled by the growth of electronic trading and the subsequent arrival of a tidal wave of new data have encouraged an increasingly quantitative approach to how the trading markets operate and has evolved the products that venues offer to their customers.

Mifid II massively fragmented the trading venue landscape in Europe and Brexit only exacerbated this further. While this has intensified competition – an undeniably good thing for the industry – it has also meant that exchange operators must fight more intensely over increasingly unreliable transaction volumes in the continuous lit markets.

Asset managers have targeted acquisitions as a method of business consolidation for several years now. Elsewhere, venues are using inorganic growth to diversify their offering and maximise their ability to cater for as much of the increasingly complex industry as possible. The trend began many years ago but it was arguably the $5 billion dollar takeover of Interactive data by Intercontinental Exchange in 2015 that was the straw that broke the camel’s back, paving the way for other mega mergers like the $27 billion takeover of Refinitiv by LSEG at the start of last year. The deal cemented the need for extensive data services provided by venues in the evolving market landscape.

“As the modern exchange industry has matured, investors have begun to view them less as high- growth companies and more as trade-matching utilities that need to operate at massive scale and don’t grow much organically,” says Justin Schack, partner and head of market structure at Rosenblatt Securities. “Consequently, exchanges have focused on diversifying, in search of steadier revenue streams that aren’t as directly tied to transaction volume, including data and other services.”

Regulatory change has also played a catalytic role in the evolution of what is expected of trading venues. Brexit shattered the European regulatory landscape and gave birth to the growing babe that we call divergence. Starkly contrasting approaches to dark trading on either side of the channel following the UK’s departure from the EU were originally expected to force some trading volumes out of the Bloc and to the UK where rules are laxer. Pan-European venue, Aquis, aware of the potential opportunity to absorb some of these volumes, struck a deal with non-disclosed venue, UBS MTF, to transfer its business activities over to it for a fee. Aquis also moved to expand its growth company capabilities and its offering in the primary markets a few years ago with the acquisition of NEX Exchange.

Speaking to The TRADE at the time of announcing the UBS deal, Haynes explained that even if volumes weren’t forced out of Europe and to the UK, it was important to make sure as an exchange operator that Aquis had the necessary tools to accommodate the changing landscape. 

“When you don’t have one of those tools in your toolkit it makes you more vulnerable. To complete the sweep, we have to do dark trading and so we have been looking at a way in which we can establish the business,” he said in March. “It gives us optionality across all the products and that is really important for us to be able to offer a complete suite as to whatever the outcome is for regulation both in the UK and in Europe.”

However, it looks as though Europe’s stance on the double volume caps (DVCs) could be about to change. Originally proposing in November to impose a blanket cap of 7% in Europe, there are now whispers that much like the UK in its Wholesale Markets Review (WMR), regulators in the Bloc could be about to scrap the DVCs all together.

New assets

The asset universe has grown exponentially over the last few years, not least in the digital space where institutional investors continue to teeter on the precipice of involvement. It comes as no surprise then that venues have subsequently chosen inorganic growth through acquisitions to capitalise on this. Take the London Stock Exchange Group (LSEG) for example. Following its $27 billion take-over of Refinitiv at the start of last year it has added portfolio optimisation services provider, Quantile, to its arsenal at the end of 2021, followed by trading systems and outsourced trading specialist, TORA, for $325 million in February and market data solutions provider, MayStreet, in May for an undisclosed price. 

The deals all bring a new tool to LSEG’s ever growing toolbox. The Refinitiv acquisition massively expanded its trading and clearing and market data capabilities – so much so that regulators put the brakes on the Refinitiv deal for 18 months and subsequently asked the exchange to sell-off its Italian bourse to Euronext to alleviate its concerns. Perhaps one of the key attractions for the exchange was the access it gave it to the world of foreign exchange for the first time – an avenue not historically open to exchanges because of its largely over the counter (OTC) nature – through Refinitiv’s FXall business. The TORA deal agreed in February, also brought LSEG into the realm of digital assets for the first time and gave it control over TORA’s extensive outsourced trading and order and execution management system (OEMS) businesses.

Speaking to The TRADE at the time of the announcement of the deal, LSEG’s group head of trading and banking solutions said its acquisition of TORA fed into its strategic aim to build out an end-to-end ecosystem. “One of the key tenets of our strategy within the trading & banking solutions business is to build out the OEMS end-to-end workflow, organically and inorganically,” he said.

LSEG has a number of existing assets in the OEMS space already including REDI, AlphaDesk, AUTEX and its FIX network, ATR. For Berry, the addition of TORA will reduce fragmentation between these systems and continue to expand LSEG’s ecosystem once completed. However, some of LSEG’s efforts to diversify have not been so successful and the exchange was forced to shutter its European derivatives platform, CurveGlobal, just five years after launching it from scratch. 

Also expanding its involvement in the digital asset space through an acquisition in light of simmering institutional demand is Cboe, which completed its ErisX deal in May 2022. The deal will allow it to access the digital asset spot and derivatives markets using a digital first platform. The combination of ErisX’s existing exchanges and clearing and settlement systems, which are regulated by the Commodity Futures Trading Commission (CFTC), and Cboe’s existing infrastructure, will be used to create Cboe Digital. Cboe plans to develop a variety of data products alongside operating the existing spot, derivative and clearing platforms. It also plans to develop a benchmark data stream to help market players evaluate the suitability of crypto execution pricing.

Aware of the developing structure of the market, Cboe has also sought to expand the variety of venues available under its umbrella. In 2017, it completed its $3.4 billion merger with exchange operator, Bats Global Markets. Cboe then looked to bolster its efforts in this space further with the acquisition and subsequent combination of Toronto based dark pool MATCHNow and BIDS Trading. It also moved to expand into the post-trade arena with the acquisition of EuroCCP in 2020. Most recently, it completed its acquisition of Neo to drive its expansion in North America.

“The drivers of our recent acquisitions have been to extend our geographic footprint and asset class reach, or to help us access new customer sets that we haven’t addressed fully before,” says Natan Tiefenbrun, president of Cboe Europe.

“Our ambition is to be the world’s largest securities and derivatives network, and we believe we can achieve that by combining M&A with organic initiatives, fuelling sustainable growth. We plan to replicate the successful playbook in Europe in other regions, building off our cash equities as a base and then introducing new trading and data products, and diversifying into other asset classes.”

Cost cutting 

In the wake of declining commissions and increased cost of trading, participants want to use one exchange operator for the majority of services. Firms incur fixed costs for connectivity and compliance when they connect to an execution venue and so connecting to one instead of multiple saves forking out several times over. 

“The more products and services a venue can provide through that connection, the more clients can mutualise cost,” says Simon Gallagher, head of cash and derivatives at Euronext. “Once Euronext’s Italian markets migrate to our new data centre and matching technology next year, clients will be able to trade seven markets, accounting for a quarter of European lit trading through one single connectivity, to the same data centre and the same trading technology.”

Euronext has undergone several acquisitions in the last year or so, not least its Borsa Italiana and MTS €4.4 billion deal born out of competition concerns around LSEG’s Refinitiv merger. The exchange operator has confirmed plans to rebrand Borsa Italiana’s clearinghouse into Euronext Clearing and make the entity its primary clearing counterparty (CCP), further propelling it into the post-trade space.

The exchange operator then moved to acquire the technology provider powering MTS from Nexi in June this year for €57 million, calling the move a new step in its strategy to leverage its integrated value chain as it further enhances its technology competencies and capabilities across trading and post-trade.

Venues have cottoned on to the fact that they must offer services across all business segments. Like a fussy child at dinner time, they can never know what the industry might want – so they must keep the fridge fully stocked, to avoid getting food on their face.

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