Opening Cross: Acquistions or Analytics: Who’s the April Fool?

Max Bowie, Inside Market Data

After much industry speculation, as Inside Market Data went to press last week, Nasdaq and the Intercontinental­Exchange teamed up to bid for NYSE Euronext, offering a 19 percent premium over Deutsche Börse’s proposed deal, leaving NYSE shareholders to mull the various cash/long-term value propositions, and signaling that the ability to compete in a global economy is something you must be willing to compete for.

Along with the prospect of a shrinking overall number of increasingly global exchange groups, the financial industry is debating how to meet regulatory demands to move over-the-counter asset classes onto centrally-cleared trading venues to reduce risk. While it’s certainly possible to move instruments onto exchanges or exchange-like alternative trading systems—such as the Singapore-based Cleartrade Exchange, which last week launched four steel indexes to support a portfolio of metal swaps contracts—a large migration would result in a corresponding increase in market data rates, which after substantial growth in recent years is now displaying more moderate increases, according to the Financial Information Forum (see story, this issue).

Meanwhile, markets are looking to diversify their offerings to new asset classes—one of the drivers behind exchange mega-mergers. This is also the reason for London Stock Exchange-owned multilateral trading facility Turquoise creating a pan-European derivatives market by subsuming the assets of the LSE’s EDX market and bringing the disruptive MTF model—which has worked so well for some cash markets in Europe since the introduction of another regulatory initiative, MiFID—to derivatives trading (see story, this issue). The resulting increases in data pose several challenges for the markets: not just the infrastructure and bandwidth required to handle this data, but also the question of how participants can find value in a flood of information.

Hence, the analytics market is burgeoning, as traders look for novel ways to cut through the noise. One example for “lit” marketplaces is liquidity analysis, such as Intelligent Financial Systems’ LiquidMetrix system, which this week will incorporate Quote MTF into its liquidity “battlemaps.” Another is pre-trade transaction cost analysis, such as the capabilities from Abel Noser that Portware is integrating into its trading platform. And yet another is using other metrics—such as the behavioral finance analytics developed by MarketPsych or the news and sentiment analysis provided by RavenPack (see stories, this issue)—to spot valuable information before it is reflected in the numbers.

And as these solutions become more sophisticated, they increasingly require new underlying technologies to give them an edge, such as derivatives pricing vendor SuperDerivatives, which is using GigaSpaces’ eXtreme Application Platform to power some of its risk management functions. This can drive acquisitions as well as alliances—for example, SunGard last week acquired UK-based ValueLink Information Services to increase SunGard’s securities pricing and validation capabilities.

Meanwhile, McGraw-Hill Financial is banking on demand for sophisticated credit pricing and analysis tools to help double its business over the next few years. (See story, this issue.)

But with this transition of OTC markets onto electronic platforms (with the contract standardization required to achieve that)—coupled with regulatory moves to herd OTC assets onto centrally-cleared venues—will the flood of new data necessitate more use of complex analytics? Or, will the more sophisticated instruments become even more of a niche—and complex analytics ultimately become less important—as the move onto exchanges reduces risk and increases transparency, while the exchange with the biggest and deepest, broadest order book across different asset classes and geographies ultimately wins out?

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