Brussels has just authorized this Wednesday the acquisition by the London Stock Exchange of the data provider Refinitiv; at the end of 2020, Deutsche Börse acquired the American proxy consulting agency ISS. A diversification that can be surprising. In reality, competition between different exchange platforms today is played out on market data.

Would stock market operators have fallen on their heads? At the end of 2020, Deutsche Börse, the German stock exchange, bought ISS (Institutional Shareholder Services), the American specialist in shareholder advice. A year earlier, the London Stock Exchange had acquired Refinitiv, a provider of financial data and analysis, for 23 billion euros. It has just obtained, this Wednesday, the definitive agreement of Brussels to be able to finalize its acquisition which places it in direct competition with the Bloomberg terminal. These two operations have one thing in common: the two exchanges have not hesitated to spend a lot of money to take over a company whose activity is very far from their core business. Until now, the German stock exchange had rather played the derivatives card, investing in Eurex, or in clearing, via Clearstream. So why such a turnaround?

Stock trading has become, over the past ten years, a mature business. Volumes are stable or even decreasing. The fault of the European Directive on Markets in Financial Instruments, nicknamed "MiFID I", which came into force in 2007 and caused a real earthquake on the financial markets. This legislative text broke the monopolies of the stock exchanges and gave birth to multilateral trading platforms (BATS Chi-X and Turquoise, for example). And then, companies no longer damn themselves to go and be listed on the stock exchange. The figures are relentless: between 2000 and 2020, the number of listed companies in Europe fell by 30%, from 2,100 to 1,450.

Alternative strategies

To survive, therefore, there is no other choice for historical stock markets than to find alternative strategies. While at first, the cross-border merger between two exchange platforms appeared to be the appropriate solution for savings, it proved difficult to set up. For political reasons, many major marriage projects have failed. Lacking the agreement of Canadian shareholders, the London Stock Exchange (LSE) and TMX, the operator of the Toronto Stock Exchange, abandoned their proposed merger at $3.5 billion in 2011. Twice, in 2011 and again in 2016, Deutsche Börse tried to merge, first with Nyse Euronext (in 2011) and then with the LSE (2016). Each time, Brussels vetoed it. The market power of this new company would have been anti-competitive.

"One of the lessons we've learned is that consolidation in the stock market seems to be a bit difficult and not have political support. And that's why we need to think about where we could grow and where we could do mergers and acquisitions," Gregor Pottmeyer, Deutsche Börse's chief financial officer, told an audience of financial analysts in 2017.

Euronext has managed to aggregate the stock exchanges of Paris, Amsterdam, Brussels, Lisbon, and more recently Dublin, Oslo and, in 2020, Milan. But it is an exception. And it didn't have the critical size until then. The latest acquisition of the Italian Stock Exchange has transformed it, by providing it with a central depository and a clearing house, key players in securing financial transactions that Euronext did not own. Just as the buyouts of the Scandinavian stock exchanges had in the past allowed it to diversify its product offer by providing it with an energy and salmon exchange.

The LSE found its new position in 2011, by taking the turn of data and stock market indices. That year, well before the acquisition of Refinitiv, he took control of the FTSE indices before taking over Russell's in 2014. More recently, the enthusiasm for ESG investing led the LSE to acquire the specialist Beyond Ratings in early June.

Data content

The logic is this: customers want sophisticated data content and analytics delivered on flexible, open platforms. Revenues from the sale and analysis of market data are recurring and less volume-dependent. They are not only an important driver of growth, but also generate a higher operating margin than other activities.

U.S. operators are also convinced that this strategy is the right one. ICE, the operator of the New York Stock Exchange, followed in the data in 2015 with the acquisition of Interactive Data. The Nasdaq did not escape the movement by offering eVestment in 2017.