Exchanges, under profit pressure, mounting defense
NEW YORK/FRANKFURT (Reuters) - Two market operators, Nasdaq OMX (NDAQ.O) and Deutsche Boerse (DB1Gn.DE), reported profit drops on Thursday, partly reflecting the price war between traditional players and younger challengers for market share and increasingly narrow margins.
Nasdaq OMX, which runs the U.S.-based Nasdaq Stock Market and venues in Nordic countries, said diluted earnings dropped 18 percent, while Deutsche Boerse, which runs the Frankfurt exchange and the Eurex derivatives exchange, said operating profits tumbled 36 percent.
Most of North America's exchanges logged similar profit drops in the last couple of weeks, stung by sagging trading volumes. Those toiling in the cash equities business -- where alternative venues and dark pools have made deep inroads on both sides of the Atlantic -- also bled market share.
"The traditional venues now are forced to go on the offensive because they are losing share in their own domestic markets," said Diego Perfumo, analyst at Equity Research Desk, a Connecticut-based advisory firm specializing in exchanges.
Nasdaq OMX's U.S. equities share fell from 30 percent to 22 percent in the latest quarter. But it has bounced back in the last two months, and management expects recent fee changes will preserve that momentum, adding to revenue this quarter.
The company will launch a third U.S. trading platform next year, giving it yet another way to attract order flow from increasingly electronic investors and market makers known as high-frequency traders, which have driven up volumes.
Deutsche Boerse, which relies far less than Nasdaq OMX on cash equities, had 68 percent of German equities market share in October, down from 74 percent in January, according to Thomson Reuters data. Its main competitor, Nomura Holdings Inc's (8604.T) Chi-X, jumped from 10 percent to 14 percent.
Deutsche Boerse this month launched a new pan-European trading segment meant to undercut prices on the smaller multilateral trading facilities (MTF) that have pressured prices and eaten into its core business. The aggressively priced segment will be fully operational in January.
RISE OF THE UPSTARTS
A series of rule changes since the late 1990s, first in the United States and then in Europe, opened the door for privately owned alternative venues to take on the exchanges -- which responded with a flurry of acquisitions that left few standalone national markets.
Now, some 35 percent of U.S. equities are matched outside of exchanges, whether they're over-the-counter, on venues such as Direct Edge, or in dark pools, the anonymous venues that account for up to 15 percent of the market.
In Europe, a few years behind changes in the United States, dark pools represented only 1.2 percent of trading, according to Thomson Reuters. The value of those trades jumped fourfold from January to 9.5 billion euros in October.
Competitive pressure will only increase.
As a result "we've seen this downward spiral on pricing. These smaller guys can be very aggressive on pricing, and it's mainly due to the fact they've got this low overhead compared to the exchanges," said Sang Lee, managing partner specializing in market structure at Boston consultancy Aite Group.
"If anything, the smaller players have dictated a lot of the pricing changes we've seen over the last couple years."
Robert Greifeld, Nasdaq OMX's chief executive, said that while many of the company's pricing adjustments worked this year, in "others we were essentially giving away money that wasn't having any impact on customer behavior."
The London Stock Exchange (LSE.L), New York's NYSE Euronext (NYX.N)(NYX.PA), and Toronto's TMX Group Inc (X.TO) have scrambled to adjust both the fees charged and the rebates provided as market share slipped in the last several quarters.
New regulation is the wild card.
Regulators on both sides of the Atlantic are probing dark pools and other developments in the complicated and interconnected marketplace. The U.S. Securities and Exchange Commission last month proposed rules that would bring more transparency to dark pools.
"Whatever change that we may see in the U.S. market, we could certainly expect to see something similar happen in the European market," Lee said.
"As off-exchange market share increases, the (European) regulators will have no other option than to look to the U.S. ... because the overall market models are so similar."
(Writing by Jonathan Spicer)
