The Exchange Industry Expands Through Diversification: Growing Revenues Through Market Data and Index Services

The global exchange industry saw a resurgence in 2016, with total industry revenues increasing to a record $28.3 billion for the year. Market data remains the fastest growing business segment for exchanges, with revenues jumping by 29.2% in 2016. But the rising cost of market data has become a lightning rod for exchanges, with end-users becoming increasingly frustrated with rising costs and restrictive usage policies, and exchanges will certainly look at other opportunities as they expand efforts to become a one-stop shop for all things trading.

The global exchange industry saw a resurgence in growth in 2016, with total industry revenues increasing to a record $28.3 billion for the year, as strong market data and index revenues supported revenue gains. Industry revenues were still dominated by trading and clearing operations, with the sector recording $18.0 billion in revenues for the year. Market Data and Index business lines added $5.4 billion to the total, followed by the Listing and Issuer services segment, which accounted for $2.3 billion in revenues.

Market Data Businesses in the Crosshairs

The rising cost of market data has become a lightning rod for exchanges, with end-users becoming increasingly frustrated with rising costs and restrictive usage policies, especially as regulatory mandates force trading firms to consume even more data as part of compliance requirements. At the same time, exchanges are looking to build out their data offerings, seeking to grow revenues as trading revenues decline.

Exchanges have devoted significant resources to enhance their market data and index offerings in recent years, with exchanges generating $5.4 billion in revenue through market data and index sales to customers. Although the total pales in comparison to revenues generated by trading clearing and settlement operations, market data remains the fastest growing business segment for exchanges, with revenues jumping by 29.2% in 2016 and recording an 11.9% CAGR since 2011.

[Related: “2016 TOP STORIES: Fight Over Market Data Fees Is Going to Get Ugly”]

The proportion of revenues from market data business has clearly become a meaningful revenue stream for exchanges, with significant growth over time. Market data and index revenue accounted for 19% of total exchange industry revenues in 2016, up from just 12% in 2011. ICE, which is the largest exchange in terms of revenues, earned 44% of total revenues from market data and index segment sales in 2016, with LSE Group not far behind, at 35.9%. On the other end of the spectrum are smaller exchanges such as the Singapore Exchange and BM&FBovespa, which reported only 4.9% and 4.4% in revenues from the segment, respectively.

Diversification Is Key to Future Exchange Growth

The exchange industry has suffered from anemic trading volumes in recent years and its efforts to diversify away from a dependency on transactional revenues is finally becoming a reality. The combination of falling trading volumes, greater competition and the need to answer to shareholder demands for adding value has forced exchanges to diversify beyond traditional transaction-related activities. The focus on market data is natural, given exchanges have long acted as a central point in the trading process, where data is generated across the transaction chain, from pre-trade data such as bids and offers, to execution prices, and finally to post-trade activities that create historical records of transaction details.

Exchanges are moving beyond transaction data, with Intercontinental Exchange’s acquisition of Interactive Data at the end of 2015 a prime example of the change. The acquisition was a big factor behind the exchange industry’s revenue growth in 2016, yet competing exchanges have been on the acquisition hunt as well. The London Stock Exchange Group acquired Russell Investments in 2014, combining its index assets with its existent FTSE index business to cement its place in the index side of the business.

Focus on the market data and index space remains intense, with ICE and LSEG seemingly in a race to snap up index providers around the world. ICE added to its portfolio of index properties, acquiring S&P Global’s Standard & Poor’s Securities Evaluations (SPSE) and Credit Market Analysis (CMA) in 2016 and announcing the purchase of the fixed income index platform from Bank of America Merrill Lynch in 2017. LSEG acquired Mergent, a provider of financial data on public and private companies, in 2016 and more recently, it announced plans to buy Citigroup Inc.’s Yield Book fixed-income analytics and indexing business. The quest for new acquisitions remains a priority for the industry, with a number of exchange executives, including those at LSEG and Deutsche Boerse, publicly stating they are on the lookout for more properties in the space.

An Evolving Industry

The global exchange industry continues to undergo a steady transformation, as exchanges evolve business models to diversify away from their dependence on transactional businesses. The combination of weak trading volumes and emerging competition is forcing incumbent exchanges to dramatically expand their focus on new business segments. Market data and index businesses are the current target of these expansion efforts, but exchanges are constantly searching for new opportunities to expand their offerings, especially as competition erodes operating margins and profitability.

[Related: “Low Volatility Intensifies Competition Among Execution Venues”]

Investments in emerging financial technology sectors may be a new focus; however, the exchange industry is stepping lightly in the space as it tries to discern the ultimate winners and losers and how these technologies fit into the sweet spots. Look for transactions on the clearing side of the business, especially as interest rates rise and earnings on margin balances add to exchange earnings. Market data and index firms may be a target of opportunity now, but exchanges will certainly look at other opportunities in the financial industry as they expand their efforts to become a one-stop shop for all things trading.

Andy Nybo is a Director at Burton-Taylor International Consulting, where he is responsible for its Exchange vertical. To learn more about how global exchanges are transforming their business models to adapt to the increasingly competitive environment, please see Burton-Taylor’s 2017 Exchange Global Share & Segment Sizing report.

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