Welcome to another issue of Front Month, a newsletter covering the biggest stories in exchanges & market structure every Friday. If you have questions or feedback, please reply to this email or find me on Twitter. If you like this newsletter and want to follow the exchange industry with me, please hit the Subscribe button below & be sure to share with friends & colleagues:
News
MSCI Strengthens Private Asset Capabilities With Acquisition of Real Capital Analytics: On August 2 MSCI announced the purchase of commercial real estate database Real Capital Analytics for $950 million in cash. RCA is one of the top providers of CRE data with over two decades of industry experience. Customers pay RCA to view historical & recent transaction data, profiles of over 200,000 investors and lenders, and unique insights on shifting trends in the industry. The deal bolsters MSCI’s real estate business and, according to the company, will integrate well with its existing private asset, ESG and Climate products. RCA generates ~$70 million of annual recurring revenue with EBITDA margins in the high 20s.
While I don’t love that they paid 14x revenue and opted for an all-cash deal instead of using its expensive stock as payment, debt is cheap these days I think the market will cheer MSCI’s decision to add more subscription revenue to its existing platform.
News Corp to Acquire OPIS: August 2 also saw S&P Global & IHS Markit make good on their promise to divest OPIS after announcing plans to do so in mid-May 2021. The companies decided to sell off OPIS to help satisfy regulators ahead of their pending merger, as OPIS competes directly with Platts and a tie-up of the two would be seen as anti-competitive. News Corp emerged as the $1.2 billion buyer with plans to integrate OPIS with its Dow Jones Indices unit and stream energy data to its index customer base.
Nasdaq Acquires Minority Stake in LeveL ATS: Another addition to the August 2 M&A news came from Nasdaq when it announced a large investment in LeveL ATS alongside Bank of America, Citigroup & Fidelity. LeveL ATS is a US equities dark pool launched in 2006 with average daily volume of ~132 million shares per day or ~0.6% equity market share as of June 2021.
The investment is notable as it follows CBOE’s 2020 purchase of BIDS, a competing dark pool about half of LeveL’s size. To me these deals look like legacy exchanges admitting that market share isn’t coming back via normal competition, and are opting to buy market share instead.
Moody's to Acquire RMS, Leader in Climate & Natural Disaster Risk: On August 5 Moody’s announced a $2 billion all-cash purchase of RMS, a provider of climate data & analytics for the insurance industry. The deal adds to Moody’s already substantial insurance analytics business which after close will generate ~$500 million in annual revenue. Moody’s is tapping the age-old industry playbook of market data M&A to diversify away from its core Ratings business, but has differed on the specific data assets it’s been chasing. While S&P Global, MSCI and Nasdaq have been largely index-first businesses, Moody’s has opted for exclusively analytics firms which carry lower margins but have more controllable growth trajectories.
Quant Shop Jump Trading Buys Blockchain Firm Certus One: Jump has become a ubiquitous presence in the institutional crypto market structure space. First it was a partnership with Pyth, a DeFi oracle that streams low-latency market data to the Solana blockchain. Then it was an investment in Serum, an HFT-grade decentralized exchange lead by FTX. Now comes the news that Jump is buying Certus One, a German blockchain infrastructure provider working to build the plumbing that connects different chains to each other and to traditional markets. Jump has been very clear about their strategy with acquisitions like this - they’re entering the space not as an investor, but as a customer looking to build the solutions they need to better connect to the crypto market. Jump can leverage its vast network of trading relationships & capital to improve the projects worth owning & invite other HFT firms to use these applications in the process.
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Other Stories I’m Reading
It's Not Just Robinhood. Money-Hungry Stock Exchanges Are Under Scrutiny Too: This is a well-written summary of an age-old message that always seems to ruffle feathers when it surfaces - stock exchanges are the big, evil, “money-hungry” bad guy and here are a long list of reasons why, etc, etc. Robinhood gets media & regulatory flak for its payment for order flow model, which critics say warps broker incentives to prioritize profitability over doing what’s best for their customers. Exchanges aren’t exempt from this debate - they give brokers similar incentives in the form of fee rebates to attract order flow to its venue over competitors.
I’ve been giving this article & the long list of others like it thought, and I think all the anger & protest thrown at stock exchanges comes down to one core message: we don’t need them anymore. US equity markets are among the largest & most liquid in the world. Millions of people interact with the market on a daily basis representing trillions of dollars. The market is so liquid in fact that it can support nearly 20 different exchanges & a host of dark pools, wholesaling venues & ATSs on a daily basis. The NYSE & Nasdaq’s competitive advantage for decades - matching buyers & sellers faster, cheaper & more conveniently than anyone else - is long gone. Articles like this are angry at the strategy of exchanges who are fighting for a competitive edge in an industry where none exist. Of course they’re charging as much as possible for data. Of course they’re lobbying to keep what little competitive tools they have left. The legacy stock exchanges are losing their structural power in the wake of uber-liquidity, and people are starting to realize it.
New SEC Boss Wants More Crypto Oversight to Protect Investors: If you’re on Twitter at all you’ve probably seen Gary Gensler’s new account, busy posting smiling portraits, uplifting market structure quotes, and a video series called “Office Hours With Gary Gensler” where the SEC Chairman teaches anons about his job. Gensler has been active both on Twitter and in traditional media about regulating the crypto industry, which has spooked the parts of crypto seen as likely targets. While he considers himself an interested fan of blockchain technology, he’s clear that the industry should not be exempt from strict oversight. The SEC’s push to regulate parts of the crypto market have put it in direct clash with the CFTC, who currently controls crypto regulation through Bitcoin’s classification as a commodity rather than a security. CFTC Commissioner Brian Quintenz recently staked his claim to the crypto industry via Twitter in an apparent direct response to Gensler’s recent comments. The CFTC-SEC fight over who regulates what part of the crypto market is far from over & will have serious impacts on how the industry matures in the coming years.
Multi-Client Net Spotting: A Better Price Exists for your Corporate Bond: The next time you hear the word "net-spotting", a term used by Tradeweb to explain why corporate bond market share is growing so well, read this. This is the clearest explanation I’ve seen thus far of the process, why it matters, and why it separates Tradeweb from competitors.
Chart Of The Week
So Robinhood completed its IPO last week. Its first day of trading was one of the worst debut performances for a large public offering - shares ended -8% on the day, sparking plenty of doom-and-gloom articles from the financial news circuit.
Fast forward one week, and Robinhood is trading ~60% higher than its IPO price. The stock’s pop coincides with the release of its options chain, resulting in a tsunami of retail call buying that is allegedly what caused the surge in shares. The stock has since receded from memetic highs after insiders filed to sell large blocks of shares, but still hovers way above its initial listing price which many argue was lofty to begin with.
The IPO to date chart really is something to behold:
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, NDAQ, COIN and VIRT. I am also long Bitcoin, Ethereum, and UNI.