Exchange Consolidation Raises Issues for Staying on Rival's Technology Platform

Everyone's talking about the wave of global exchange consolidation, but what about the exchanges that end up running on a competitor's technology platform? It's interesting to consider whether exchanges that run on a trading platform that gets acquired will try to ditch the technology once it's owned by another exchange competitor.Take the case of the International Securities Exchange (ISE), which uses OMX's Click platform as its matching engine for trading U.S. equity options. While OMX is a leading supplier of exchange technology, it will soon merge with Nasdaq, which is also buying the Philadelphia Stock Exchange, the third largest U.S. equity options exchange. Nasdaq's acquisition of PHLX will position the stock exchange to compete with the ISE in equity options trading. But will Eurex, Deutsche Boerse's derivatives market operator that is acquiring ISE for $2.8 billion, want to pay software revenues to OMX, its competitor?

One industry expert contends that exchanges have no desire to run on a competitive exchange's technology platform. "An exchange is not going to want to pay revenue to a competitor," says Michael Henry, head of Accenture's financial services strategy practice in North America. "You can bet that under the guise of achieving synergies they're going to be moving off that platform as quickly as possible," says Henry referring to ISE using OMX technology and CME Group, which is moving the Chicago Board Of Trade (CBOT) off the LiffeConnect platform, owned by EuronextLiffe (which is part of NYSE Euronext) and onto the CME Globex electronic trading platform.

But ISE claims it's staying with the OMX technology platform which has been customized by the ISE and contains a number of patented components that are integrated with the OMX technology, notes an ISE spokeswoman. "OMX has been a great technology partner for ISE," says the spokeswoman. "From a legal standpoint, our contract with OMX survives both our change in control and theirs. There are no current plans to consolidate trading platforms once our transaction with Eurex closes," says the spokeswoman.

In May, ISE COO Gary Katz (who becomes CEO in January 2008) told the media at a briefing that the exchange still plans to move from the current OMX platform to a newer OMX platform called Genium.

The ISE spokeswoman points out that OMX has put in certain safeguards. "Our contract with OMX for Genium also provides that OMX put an information barrier in place between their technology side and their exchange business to protect proprietary information," she says.

Aside from these competitive issues, one reason that exchanges may stay on a competitor's platform, is that it's difficult to get off. "So really the conflict of interest is that once an exchange adopts this core trading technology, it is not easy to replace," observes William Cline, managing director of Acai Solutions in New York. That is why Nasdaq CEO Bob Greifeld wanted to acquire OMX's technology business, says Cline. OMX, with over 60 customers in more than 50 countries, is the leading provider of technology and services to exchanges, clearing organizations and central securities depositories, according to its Web site. "I'm sure the single biggest reason that Greifeld wanted to own it is that he recognized that technology could e a stickier thing than interpersonal relationships and it could position him in the consolidation game as things play out," says Cline.

And similar deals are probably cooking. Only two weeks ago, DIFC Investments, the investment arm of the Dubai International Financial Center, (which owns the Dubai Stock Exchange), acquired SmartStream Technologies, a middleware and back-office technology vendor, for 200 million euros (about $430 million USD), from TA Associates and the company's management and employees. "It's true to say the middle and back-office is stickier than the front-office," adds Cline.Everyone's talking about the wave of global exchange consolidation, but what about the exchanges that end up running on a competitor's technology platform? Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio