There is a Swedish saying that you should leave a party when it is at its best. That's according to Olof Stenhammar, the founder and chairman of OMX, the Nordic Exchange and technology company that Nasdaq (NASDAQ:NDAQ) intends to acquire for $3.7 billion. Coincidentally, Stenhammar retired from OMX earlier this year. After being treated as a party-crasher by the London Stock Exchange, Nasdaq CEO Robert Greifeld has been warmly received in Stockholm. Is Nasdaq late to the exchange consolidation party, or does it have a new exchange equation?

The standard story
Each new exchange acquisition is accompanied by a standard story for investors, and Nasdaq's acquisition of OMX follows the same  plot. Chapter One is diversification. Buying OMX diversifies Nasdaq's revenue stream away from U.S. equities. Adding OMX's derivatives system enhances Nasdaq's multi-asset trading capabilities. Chapter Two is revenue synergies, slated at $50 million per year for the Nasdaq/OMX combination. These will come from cross-selling the other's services including, for example, European sales of Nasdaq products and dual listings. Chapter Three is cost synergies, estimated at $100 million a year. These will come from rationalizing technology systems, platforms, and real estate. But then the plot twists.

The new exchange equation
OMX operates an unusual model for an exchange, which we can call the new exchange equation. Nearly half of its revenue is earned the traditional way, offering listing and trading services, in the Nordic exchange. Geographically, this business covers Stockholm, Helsinki, Copenhagen, and Iceland. Selling data about the trading on the exchange -- called information services -- is also typical for an exchange, at around 17% of revenue.

Where OMX really differs is the 35% of revenue earned in its market technology business. As Greifeld pointed out in the investor call, this is a unique asset in the exchange world -- the only operation close is the Atos Euronext structure, now part of NYSE Euronext (NYSE:NYX).

OMX's market technology group is arguably the leading provider of exchange technology in the world, providing trading software to 60 exchanges. Prominent users include International Securities Exchange Holdings (NYSE:ISE) and Borsa Italiana. Yet, according to Magnus Bocker, chief executive officer of OMX, its market share in the exchange technology business is probably 2%, indicating how fragmented the market is.  However, several industry trends will benefit the market technology group.

The biggest trend is that technology is the heart of the modern exchange. With the need for multi-asset trading and regulatory changes, such as Regulation NMS in the U.S. and MiFID in Europe, the pressure on exchange technologies is intense. Additional trends include exchange consolidation, which requires integration and often replacement of old systems. Plus, emerging markets want their own national exchanges, and are ill-disposed to build their own trading systems.

I dream of Genium
OMX is well-positioned for these trends. In February 2007, it released a new trading system, Genium, designed to be the world's fastest trading platform, offering high flexibility and a complete set of trading and post-trading services. In the past two years, OMX has invested nearly $60 million in its market technology business, mostly in Genium. It expects to spend around $19 million a year, or 10% of revenue, on technology research and development in the future. State of the art trading platforms require substantial investments, which will encourage most exchanges to buy their technology from outside suppliers, such as Nasdaq/OMX.

Nasdaq/OMX will recoup the investment in Genium by using the platform in the Nordic Exchange and hooking Nasdaq's INET system to it. The platform can then be offered to the group's 60 exchange customers to create what Greifeld calls a "virtual global exchange."

Dark forces
Overall, acquiring OMX is a strong deal for Nasdaq. It allows Nasdaq to exploit the new exchange equation, and the price paid is fair compared with some recent exchange transactions. But there are dark forces threatening all the exchanges, especially in equities trading.

Dark liquidity pools are the first dark force. These are internal crossing networks, where large broker-dealers match trade orders internally, but do not display quotes to the market. Most of the top investment banks have one, including Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Merrill Lynch (NYSE:MER), which has a joint venture with Investment Technology Group (NYSE:ITG). Dark pools threaten exchanges because they take order flow away from them, though they still rely on the exchange for a reference price. According to the Tabb Group, dark pool volumes will account for 15 percent of total market share by 2010.

The next dark force is the reaction of the exchange's best customers to the go-go, for-profit exchange model. Many seem to prefer the old utility model, where members owned the exchanges, and trading services were provided at cost plus a modest profit for reinvestment. Examples include the planned Project Turquoise in Europe, a consortium of large investment banks that plan to build a multilateral trading facility --- effectively an exchange -- to trade cash equities. Also, the major investment banks are enthusiastic users of, and investors in, Nasdaq-killer BATS Trading. Just this week, BATS raised another $45 million from investors including Citigroup (NYSE:C), and Lehman Brothers (NYSE:LEH).

BATS Trading, based in Kansas, raises the final dark force: the cost of technology. Despite investing only $8 million in technology last year, BATS now handles around one-tenth of all trades in Nasdaq-listed securities. Exchanges will need to take a rigorous, investment-based approach to future technology spending and consider the most cost-effective options, whether it is Kansas or India.

The exchange consolidation party is still in full swing, but investors should remain extremely clear-headed.

Global Gains lead analyst Bill Mann departs for China, India, and Taiwan on June 2 in search of new investment opportunities in some of the world's fastest-growing economies. Get updates and analysis live from the field by sending Bill an email at

Nasdaq is an Inside Value recommendation, and NYSE Euronext is a Rule Breakers recommendation.  

John Finneran writes and advises on increasing the financial value of technology. He does not own any of the shares mentioned. The Fool has a disclosure policy.