Advanced Trading: Why were exchanges pursuing mergers when they have a mixed track record on the returns they bring investors?
Sussman: I think the hypothesis was that even though mergers in the past hadn't quite delivered excess returns for shareholders, that had they not gone through them the result would have been worse. That's also a component of their attempts to merge in the latest round. The best-case scenario is they realize these synergies and reduce the overhead in the combined company. And through the mergers they're able to facilitate cross order flows. They do a better job of capturing international listings and so forth.
[Why Global Exchanges Must Choose Between Domination or Irrelevance.]
Advanced Trading: A number of high-profile mergers collapsed, most notably the one between NYSE Euronext and Deutsche Boerse. What's next for the industry now that it appears mergers won't be a huge trend?
Sussman: They're going to take a more tactical approach in trying to achieve the same results they might have through the merger. So one of the benefits of the NYSE-DB merger would have been now you have this clearing entity within the combined unit and you can do a lot with that. Now you're not going to get that through the merger.
Well, ok, let's build it on our own. There are key assets that would have been shared in the merger that each firm will now try to go out and either build or acquire on their own.
Advanced Trading: How critical are derivatives now for exchanges? How competitive has this space gotten?
Sussman: That's where the competition is focused. I don't think it's focused on the cash equity space at all. A lot of what you see going on now is more related to the derivatives side of the business than the cash equity component. The cash equity component already has a number of competing venues. Maybe there's already - at least in Europe - competing settlement systems.
If you take U.S. equity options as an example, that market has weathered the downturn in volumes much better than U.S. cash equities. I can't remember year-to-date what the numbers are for U.S. equity options, but it hasn't suffered as much as the U.S. cash market has. And I think that holds relatively true in a lot of other markets.
Advanced Trading: Could we still see some level of merger and acquisition activity in this space? Perhaps deals on the level of the London Stock Exchange's recent purchase of LCH.Clearnet for example?
Sussman: The exchanges will continue to engage in M&A activity. I just don't think it will be at the scale we had seen. And it may be even be more focused on technology companies or other pieces of the trading ecosystem that pose less of a threat. That will pass the regulatory hurdles that these larger mergers have not.