Whenever someone pitches me about a new “exchange” I always ask them about clearing and settlement. They want to tell me how great their matching engine is and how easy the access is. The important part of an exchange is the back office, clearing, and settlement. Matching trades is pretty simple actually.
It is the number one strategic asset of a CFTC-regulated exchange. One of the first things ICE did was buy the NYBOT not because it was such a vibrant marketplace but because it had a captive clearing house. Back in the day, I always thought it would have been a good strategy for CME to buy all the exchanges that owned their own clearing in the US, forcing everyone else to do business with the BOTCC but I digress.
One of the downsides to being SEC regulated is that clearing is not considered an asset. It’s a utility. There is what is known as “fungibility” in SEC contracts so there is no strategic advantage to build a top-flight clearinghouse.
However, because government reporting and regulation are so complex, Thoma Bravo found a way and profited today from a transaction with NASDAQ. It was a brilliant play by the private equity firm. They bought two firms and combined them to form a juggernaut in the settlement and reporting of transactions on the SEC side. NASDAQ bought it for over $10B. The WSJ reports,
Adenza provides software to help manage trading, risk management and post-trade processing in markets such as currencies, fixed income and derivatives. Its technology also streamlines the process of reporting data to regulators, a task that has become increasingly time consuming for banks due to the Dodd-Frank Act and other rules imposed after the 2008 financial crisis.
Thoma Bravo isn’t saying what they paid for the two firms, but I am going to guess it was less than $1B each. Big win for them and their LPs. But, the firm saw through the fog and created something that is a big win for customers. Private equity gets a bad rap most of the time in the press but deals like this are why PE exists.
This seems like a boring deal but it’s big for NASDAQ and will help it compete with dark pools, and the NYSE.
Transparency in clearing, as far as coming regulatory action is concerned, will become tantamount, because the darkness of the private trading operations is long overdue for some sunlight. And yes, as an old floor rat, I know I'm biased.