Is bigger better?
The march of consolidation in the financial exchange sector continues unabated, with the CME’s bid for NYMEX just the latest (and almost certainly not the last) in a long line of deals that started in earnest a couple of years ago. (Hmmm…not long after AmazonBay hit the scene…) With a valuation of $11bn being bandied about, the smart folks over at General Atlantic (a firm I admire very much and whose many investments in the financial services space indicate a vision that will be familiar to readers of this blog) must be yet again chilling the bubbly. Recall they bought a 10% stake in NYMEX just 2 short years ago at a valuation of $1.6bn. Great trade.
But while the exchanges become fewer and bigger (like the banks and insurance companies before them), do they necessarily get better? Some elements of their business clearly lend themselves to economies of scale, but at what point to these come at the expense of dis-economies of complexity and bureaucracy? (Not to mention anti-competitive concerns…) But very few CEO’s or Board’s are predisposed to cellular division, a path of inexorable growth and consolidation is the default strategy in most industries. Which of course leaves lots and lots of room for innovative and unencumbered entreprises to bubble up in the shadows of these giants. Not such a bad state of affairs.
