UPDATE: LSE Eyes FTSE-Russell Index Data Combo

The LSE plans to combine FTSE with Russell Indexes, to diversify its revenue streams and expand into the US market, creating a global index business with more than $9 trillion in assets benchmarked to its indexes.

The combined business would have $466 million in revenues and is expected to deliver annual run-rate cost savings of $78 million by end of the third year following the acquisition, as a result of initiatives including combining sales structures and research functions, eliminating data source duplication, and by integrating the two vendors’ index operations and systems, according to a presentation delivered by LSE officials Thursday, June 26.

“Between Russell Indexes and FTSE today, there are three technology platforms—two on the Russell side, and one on the FTSE side, and this will basically be merged into a single one,” said LSE chief executive Xavier Rolet.

“Russell obviously has its own technology capabilities, and to a certain extent also relies for certain functions on external providers,” Rolet said, referring to Russell’s internal index calculation platform and its RussellTick index data delivery platform, which is run by the New York Stock Exchange using a technology platform originally developed by former distribution partner Nasdaq OMX.

Playing FTSE?
Though Rolet did not specify which platform LSE will seek to standardize the combined index operations on, he noted that LSE and FTSE “tend to do more things in-house, so there is enormous scope for cost reduction… owing to the technological simplification,” adding that “We really want to bring the best of breed…. Think of this as three into one, hence the size of the savings.”

Observers also suggest that LSE—already a provider of third-party exchange matching and data distribution platforms via its MillenniumIT subsidiary—will migrate Russell’s platforms to proprietary LSE-FTSE technology, eliminating the costs of leasing calculation and distribution technologies from other exchanges.

“[There is] no question that LSE will migrate [RussellTick’s] technology to another solution, hopefully internal, otherwise from a neutral vendor,” says Joséphine de Chazournes, senior analyst at research firm Celent, noting that one of LSE’s first moves after its Borsa Italiana subsidiary acquired a 70 percent stake in European bond multilateral trading facility EuroTLX was to migrate the MTF from its legacy matching technology based on Nasdaq OMX’s Click XT system to the LSE’s Millennium platform.

Any technology consolidation may not take place immediately. “I don’t expect an immediate rip-and-replace of arrangements in place, as that would be disruptive to business,” says Virginie O’Shea, senior analyst at Aite Group, adding that not migrating immediately would not necessarily have any detrimental reputational impact, since it is common for exchanges to lease other marketplaces’ technology platforms. “So I don’t anticipate the market would frown on those kinds of arrangements, regardless,” she says.

In addition to technology synergies, officials also said the exchange has identified revenue synergies between FTSE and Russell, including “significant cross-selling opportunities” and the ability to migrate Russell—which generated $162 million in revenues from indexes in 2013—to “a fee policy and a commercial approach closer to FTSE,” which made $296 million for the year ending March 31, despite having only $4 trillion of assets benchmarked against its indexes, compared to $5.2 trillion for Russell.