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Exchange Mergers Hold Potential for Lower Data Fees

The Wall Street Journal

NEW YORK—The wave of exchange mergers that has surged forth this week could make trading cheaper, thanks to potential cost-cutting in the lucrative fields of technology and market data.

Market data, a vital and pricey expense for modern traders, has become an increasingly lucrative business for exchanges as electronic trading has come to dominate global markets. So, the week's planned coupling up of major exchanges on both sides of the Atlantic brings with it the prospect of lower fees for trading firms and some other market participants as tie-ups would bring not just exchange consolidation, but also consolidation in the systems used to send out market data.

In little more than the span of 24 hours this week, Big Board operator NYSE Euronext confirmed it is in merger talks with Deutsche Börse AG, while the TMX Group Inc., operator of the Toronto Stock Exchange, is in similar discussions with the London Stock Exchange Group PLC.

One obvious area for the merging exchanges to cut costs will be to combine their systems for generating and sending out market data, said Herbie Skeete, managing director of London-based exchange consultancy Mondo Visione.

Because the exchanges likely have some overlapping customers for their market data, it is hard to tell whether they will ultimately make more revenue from combined data feeds, he said. But it could still be good news for market participants, Mr. Skeete said.

"It could lead to lower fees," particularly for firms that collect data from all the different exchanges and distribute it, he said.

Others were skeptical that lower costs would trickle down to traders.

"I don't think you'll ever see fewer fees—maybe a different pricing model," said Andrew Actman, chief strategy officer at Lightspeed Financial, a trading and brokerage firm. Exchanges are probably more apt to consolidate fees than to eliminate any altogether, he said. Still, he said, traders will benefit from easier access to more markets.

"From a trader's standpoint, it's always easier when you can trade different markets or different asset classes through one exchange," Mr. Actman said.

One sector that could take a hit from the mergers would be the data centers that rent out space to firms and exchanges hoping to locate their servers as close as possible to other exchanges' market data.

Some market participants may decide to move their business to the two data centers NYSE Euronext recently spent $500 million to build: one in Mahwah, N.J., and one near London.

"NYSE is moving into the financial-data space in a more aggressive way," said Jim Ousley, chief executive of data-center operator Savvis Inc. "As they pick up other exchanges, you could see a shift," though Mr. Ousley didn't expect his business to be affected.

As the prospective mergers come under regulatory scrutiny and Wall Street analysis, the role of technology and market data is likely to remain in focus. The expected mergers underscore the increasing importance of market data and technology to exchanges' way of doing business in a rapidly changing electronic, global market.

"The reality is that the exchange model that had been working on the transaction-based fee has been regulated away," said Frank Piasecki, president of Activ Financial Systems Inc., a market-data and trading-technology provider.

Meanwhile, exchanges are well aware that the value of their information has only increased, he said. On Tuesday, NYSE Euronext reported 2010 fourth-quarter transaction and clearing fees of $713 million, a decline of more than 11% since the same period of 2009. By contrast, combined revenue from market data and technology rose to $177 million, up 8.6% from the prior year quarter.

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