You Broke Our Heart, Jeff


We always look forward to reading though the earnings call transcripts from the stock exchanges each quarter. There is often a nugget or two of information from the exchange CEO’s that surprises us and makes us question if exchanges actually care about a healthy market structure or if they only care about their own bottom line.  Here are two good examples from the 1Q quarter calls:

NYSE (Intercontinental Exchange)  

Brian Bedell – Deutsche Bank Securities, Inc.

So if those liquidity pools were cut up a little bit [referring to Brexit], you don’t think that would have a material impact on the pricing ability on both the clearing and the trading side?

Jeffrey Craig Sprecher – Intercontinental Exchange, Inc.

Might have just the opposite, in fact. We’ve seen – think about the new entrants that have come into some of our markets where they create a new pool of trading. Let’s take energy for example, there’s some new entrants, new pools of trading. What does it result for us? Record volume, record open interest, record revenue. Look at European interest rates, new competitor there, record volume for us.

When you split these liquidity pools, and entrants may do that and regulators may cause that, what happens is that overall volumes tend to go up because the market starts to arbitrage and tries to put the market back together, the value of data goes up. And the whole thing for us turns out to be very good business. We fight that because we don’t think it’s in the best interest of the market. We have ways of growing otherwise, but we have positioned ourselves for more fragmentation which ultimately I think leads to higher revenues and earnings for ICE.

You broke our heart, Jeff, you broke our heart.   We had such high hopes for the NYSE after ICE took them over but it seems like they have dropped their market structure reform calls and are simply chasing the dollars now.  We remember when Mr. Sprecher testified before the Senate Banking Committee in July 2014 and warned about the dangers of fragmentation:

We also have concerns about the rising level of fragmentation and believe that the increased technology cost and risks that are born from maintaining connections to as many as 60 trading centers is unnecessary and ultimately increases costs to investors…The lack of order competition in a fragmented market negatively impacts markets in the form of less liquidity, information leakage and wider spreads.”

What happened to the old Jeff Sprecher who wanted to ban rebates and limit fragmentation?  What happened to the “Grand Bargain”?  What happened to NYSE taking the lead in market structure reform?  NYSE now has 4 US stock exchanges (NYSE, NYSE Arca, NYSE MKT, NYSE National) in their family and continues to profit from this increased fragmentation.


Vincent Hung – Autonomous Research US LP

Hi. So in this Virtu-KCG deal, they’re looking to extract some synergies from savings on market data. Do you see any revenue impacts from this and are you concerned by any further consolidation in the HFT industry?

Adena T. Friedman – Nasdaq, Inc.

So I mean I think that there will be some impact. We’re still assessing exactly what that would be and they obviously have to go through and I’m sure they have certain assumptions, but we have some work to do just to make sure that we fully understand it. It’s not going to be significantly material, but as we said, consolidation in the HFT industry could have some impact on our maybe data and connectivity services, and at the same time, what we have found is when there has been consolidation in the industry in the past, it tends to give rise to new players and so the net of it has usually been a lot more muted than what you would expect in terms of initial impact, and that’s just – by the nature of the industry frankly is usually when there’s consolidation, someone else sees it as an opportunity to get in and that has been the history of our business. So we see it as – on a netted basis, we’re not particularly concerned, but we definitely obviously are evaluating it right now.

Considering that market data related services represent a substantial chunk of exchange revenue, we’re kind of surprised that Ms. Friedman doesn’t seemed too concerned about HFT consolidation. Based on her comments, she seems to think that new players will pop up in the HFT industry to offset Nasdaq’s lost revenue due to consolidation. While this may have been the case a few years ago, we think times have changed.  The cost of shaving nanoseconds off of latency keeps getting higher and is creating larger barriers to entry for new electronic firms.  Ms. Friedman and other exchange CEO’s might be hoping for more volatility to offset the consolidation problems.  Or maybe they are hoping for an overhaul of some market structure rules to create a new playground for their highest volume HFT clients?

Another quarter in the books and another quarter of earnings call comments which reveal that exchanges only care about their own bottom line and could care less about capital formation and bringing buyers and sellers together.