(501) The cost of carrying out a derivatives transaction comprises the following implicit and explicit elements: the bid-ask spread and market impact, the opportunity cost of posting collateral, membership fees as well as per transaction trading and clearing fees. The implicit cost of trading represented by the realised bid-ask spread is typically several times greater than the other costs traders incur.454
(502) The market investigation confirmed that traders in general take into account the total cost of trading (including both implicit and explicit fees) when deciding where to trade.455 Derivatives exchanges compete on the explicit portion of costs (including rebates, market making incentives and collateral costs) to attract liquidity to their platform whilst implicit costs are mainly a function of the achieved bid-ask spread. (503) The Notifying Parties publish public fee schedules indicating headline fees for trading
and post-trade services. However, headline fees rarely reflect the actual fees paid by customers as these are influenced to a large extent by rebate schemes, which, because they may be tailored to specific customers456 are difficult to analyse other than on a case-by-case basis. Rebate schemes are nonetheless an important way by which the Notifying Parties respond to competitive situations and try to attract most valuable customers. In this context, NYX states that […]*457 DB acknowledges that […]*, although states that […]*.458
(504) It follows that the Notifying Parties' internal documents recognize that there are customers with different price sensitivities and […]*. This was also confirmed during the market investigation which indicated that the relative importance of explicit trading costs may differ according to the type of customer; liquidity providers tend to consider the level of trading fees as very important due to the high transaction volume they handle, while other customers indicated that the level of fees are not so important. Exchanges can and do exploit this different price sensitivity and compete for more price sensitive customers and those who bring liquidity to the exchange by granting them discounts.
(505) The ability of the Notifying Parties to price discriminate between various types of customer is evidenced for instance by their applying different transaction fees to liquidity providers and to liquidity takers. Moreover, the Notifying Parties are able to
454
In the Form CO, Derivatives, paragraph 6.181, the Notifying Parties state that the difference is "several orders of magnitude", a formulation also inadvertently taken over by the Commission in the SO. However, this appears to be an exaggeration. Indeed, as DB argues in a public document, "for many of the most liquid products (or so-called global benchmark products) at the globally leading derivatives exchanges, such as the Bund Future at Eurex, bid-ask spreads have been constantly close to their potential minimum level since the late 1990s", implying that, for these products at least, transaction costs are a more significant part of the overall cost of trading (see "The Global Derivatives Market: An Introduction: DB White Paper", op.cit., p.31.
455
See Recital (249) of this Decision.
456
Notifying Parties, response to question 13 of the Commission's RFI of 8 August 2011.
457
NYX, response to question 15 of the Commission's RFI of 8 August 2011.
458
apply different fees depending on whether the trade is executed on behalf of a client or for an exchange member's own account. For instance, in the case of Dutch Stock options on Liffe, a member would be charged a trading fee of Euro 0.15 per lot (with a maximum fee per order of Euro 80) if the execution is for its own account compared to Euro 0.75 per lot (with a maximum fee per order of Euro 160) if the trade is executed on behalf of a client.459On Eurex, although order book per-contract fees are the same, a lower threshold for discounts typically applies when clients are trading options on own account than when they trade them for client account460. This practice concerning fees indicates that the different price elasticity of different types of clients – possibly caused by the lower ability of certain customers to switch to alternative solutions and substitute away from the exchange – can be exploited and captured by both of the Notifying Parties.
(506) The ability to use its rebate policies to discriminate between customers with different price elasticities is recognised by NYX in an internal document discussing its pricing strategy. […]*:
§ […]*461
(507) Fee competition is the most common type of competition when exchanges try to attack an existing product. As a result, fee competition (including rebate schemes) between derivatives trading platforms is not limited to the Notifying Parties' platforms and products, but generally observed in the industry.
(508) Thus, for example in relation to Italian single stock futures, which NYX offers both on its order book and through Bclear and where it currently faces competition from both Eurex and IDEM, it introduced fee caps for order book trading of these specific instruments citing […]* and considering that […]*.462
(509) Similarly, in the US, Liffe and ELX have recently tried to challenge CME for its Eurodollar and US Treasury futures contracts, as a result of which CME lowered its fees.
(510) In the same vein, Turquoise's attempt to challenge Liffe on FTSE Futures, though so far unsuccessful, sheds some light on the importance of fees.463 Although in this case, market participants confirm that Liffe did not respond with a fee reduction on order book,464Citigroup draws attention to the fact that Liffe did respond by means of certain fee reductions and fee caps on FTSE futures trades transacted in block size on Bclear.465
459
On 24 October 2011, NYX made public an amendment to its fee schedules for Dutch stock options as of 1 December 2011, allegedly (according to submissions and comments made at the Oral Hearing) in response to .[…]*. This is discussed further in Section 11.2.1.5.3.3 below. See http://globalderivatives.nyx.com/sites/globalderivatives.nyx.com/files/an_11-023.pdf.
460
DB, response to the Commission's RFI of 8 August 2011, Annex 1.
461
NYX Internal Document, "NYSE Liffe – Global Derivatives Strategy", June 2009, slide 14.
462
NYX Internal Document, Email of 3 August 2010 from […]* to ,[…]*, ENX-00260. London Notice 3282 of 28 April 2010 applied these caps to order book trades and was followed by London Notice 3290 of 1 June extending this to block trades.
(http://www.euronext.com/fic/000/056/821/568213.pdf and http://www.euronext.com/fic/000/057/695/576950.pdf, both viewed on 30 September 2011).
463
ICAP, response to question 51 of Q8 - Questionnaire to customers, phase II [...]*.
464
See responses to question 71 of Q8 - Questionnaire to customers, phase II.
465
This is in line with the fee information provided by NYX itself.466 The fees in 2011 were indeed reduced from […]* to […]*467, and caps introduced of […]*. This limited response is consistent with the perception by NYX that this threat had a low probability to succeed.468
(511) It should be further noted that exchanges also have in their direct control the cost of clearing, both in terms of fees for clearing, as well as the cost of collateral (haircuts on interest provided on collateral posted in cash and safekeeping fees for securities).469DB can also determine, and Liffe at least influence, the total volume of collateral posted via clearing policies on allowable margin offsets and contributions to default funds. The incentive to implement and maintain a collateral policy which provides as much scope as possible for margin offsets between correlated instruments, subject to appropriate risk management standards, is related, at least in part, to whatever competitive constraints the merged entity would face.
(512) This last point is made clear in internal documents of DB relating to its new portfolio- wide margining approach, PRISMA. Thus, DB states […]*470; […]*.471
(513) Price competition is also a key component of competition between the Notifying Parties in the services they offer for trade entry, registration and clearing of off order book and flexible options and futures, discussed in the following Sections 11.2.2 and 11.2.3. (514) It follows that, to attract or maintain liquidity on their platforms, derivatives exchanges
compete on fees (including various rebate schemes granted to customers according to their price sensitivity) as concerns both existing and new derivatives products.