As Brad Bailey, senior analyst at Aite Group, puts it, “where there’s smoke, there’s fire.” And of course to exchange consolidation watchers it’s no big surprise then that Nasdaq announced its acquisition of the Philadelphia Stock Exchange for $652 million.

“There has been talk about this acquisition since the beginning of the year and if we go back even further, Nasdaq has been discussing internal construction of an options market before that,” says Bailey.

“The options market is continuing to grow strongly with the growth of electronic trading, the evolution of the market structure and overall in volatile markets options tend to do better,” he adds.

The Philadelphia exchange currently ranks number three in the top U.S. options exchanges. “With Nasdaq’s own internally developed technology around options and Philly’s recent improvements, this puts them in a strong position,” adds Bailey.

Nasdaq has said the Philadelphia exchange’s market structure will remain and that the electronic options trading platform will operate along with the trading floor in Philadelphia.

“Short term we’ll see using what Philadelphia has in place, but longer term there are some interesting synergies for the technology Nasdaq has as well,” says Bailey. “Nasdaq has such a vast tool box of technology…and what they’ve acquired in recent deals such as OMX, which is one of the leading exchange technology and service providers. It will be interesting to see.”

Bailey doesn’t see the exchange consolidation slowing any time soon either, but sees opportunities expanding beyond the U.S. “South America is going to be a very interesting place to watch in terms of exchange in the next year,” he says.

Beyond options, the acquisition also brings Nasdaq a futures market operated by the Philadelphia Board of Trade, the equities business and the Stock Clearing Corporation of Philadelphia (SCCP). The acquisition is expected to close in the first quarter of 2008.

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