State Street in Custody Battle

The merger of Bank of New York(BK Quote) and Mellon Financial(MEL Quote) may force the hands of its main competitors in the custodial and securities processing business.

The union of Bank of NY and Mellon will create the world's largest securities servicing and asset management firm. Wall Street is applauding the $16.5 billion stock swap because it creates a more scalable business and in the fee-driven custody and processing business, size is everything.

Shares of the two companies soared after the news. Bank of New York rose $4.11 or 11.6%, to $39.59, while Mellon rose $2.51 or 6.3%, to $42.56.

But also rising Monday were shares of State Street(STT Quote) and Northern Trust(NTRS Quote), two other large trust and processing banks, with many on Wall Street predicting they will either come together in their own marriage of convenience, or get acquired by some big commercial lenders.

Shares of State Street rose $2.90 or 4.7%, to $64.40, while Northern Trust's stock rose $2 or 3.5%, to $58.47.

"The deal is so compelling that it is likely to pressure some of the company's competitors to think about acquisitions," says analyst Richard Bove of Punk Ziegel, in a research note. "It takes two aggressive price competitors and combines them, presumably allowing prices to stabilize in some sectors of their businesses."

Custody banks typically perform investor services, such as recordkeeping and back-office services for institutional investors, like mutual funds and pension funds. It's a business that's heavily dependent on fees and the bigger a bank is, the more say it has over pricing and the ability to take market share from smaller players.