Analysis: Boerse/NYSE deal marks global endgame

LONDON Thu Feb 10, 2011 12:03pm EST

The New York Stock Exchange is seen February 9, 2011. REUTERS/Eric Thayer

The New York Stock Exchange is seen February 9, 2011.

Credit: Reuters/Eric Thayer

LONDON (Reuters) - A Deutsche Boerse (DB1Gn.DE) and NYSE Euronext NYX.N tie-up vaults them into the global top league and marks the endgame for global exchanges, leaving rivals no single deal to play catch up.

Since the 1990s the dream of a global bourse has gripped exchanges only to be dashed by big egos and nationalism.

Plans for transformational trysts involving Deutsche Boerse, Paris Bourse and London Stock Exchange (LSE.L) all failed and it was left to NYSE to make a decisive grab for what became Euronext.

While the agreed merger of LSE and Canada's TMX has piqued the interest of industry experts, the merger talks between Frankfurt and New York leaves them breathless and drawing comparisons with the Chicago Mercantile Exchange (CME.O), the world's biggest derivatives marketplace.

"I think it's a game changer and it really does build a futures market to seriously look like the CME," said Ruben Lee of the Oxford Finance Group which advises exchanges.

"This is the start of the endgame. It's hard to see any other major global exchanges being formed. The only possibility would be some form of Asian bloc but that is still a fair bit away," Lee said.

The move leaves few cherries that can be picked or are worth doing so.

Exchanges like Warsaw, Athens and others may now be left in peace because mergers with bigger fry will be needed to catch up with the mega bourses and not many of them are available, experts said, citing Zurich and Madrid as key candidates.

WHAT NOW NASDAQ?

"Suddenly even Nasdaq looks a much smaller business now and it's not clear what it can really do to bulk up," said Patrick Young, an exchanges consultant and derivatives expert.

"To vault to the same level as the CME and Deutsche Boerse/NYSE Euronext, is going to be very difficult as there is no one deal that gets you into that space," Young said.

Asia is not seen as an overly fertile ground for mega mergers to compete with the CME and a Boerse/NYSE combination.

Hong Kong Exchanges and Clearing (0388.HK) said on Thursday it would look for deals with other players, adding to merger speculation in Asia where Australia's ASX (ASX.AX) is trying to merge with the Singapore Exchange (SGXL.SI).

"I can't see Singapore allowing the exchange to be taken over by Tokyo or Hong Kong so at least those three are out of bounds. They will continue to sell strategic stakes so as not to lose out but they won't give up control," Lee said.

Derivatives is the key asset class that will be affected, a sector dominated by the CME and with good growth prospects as margins in share trading are squeezed by relentless competition.

The LSE, bent on becoming a commodities trading giant, could be tempted to follow its TMX deal by linking with the Johannesburg stock exchange, which already uses LSE technology, to gain exposure to Africa's resources.

COMPETITION CONCERNS

Creating a giant won't be an easy ride as regulatory and possibly competition issues loom.

The merger of Deutsche Boerse and NYSE Euronext would mean a combination of two arch European derivatives rivals, Eurex and LIFFE, a step London brokers expect to raise antitrust issues.

Liffe traded 61.7 percent of European single stock futures contracts in 2010 while Deutsche Boerse-owned Eurex handled 32 percent, giving the combined group a potential market share of almost 94 percent, according to the World Federation of Exchanges.

The combined group would also control almost half of U.S. options trading and leap-frog the LSE and alternative trading platform Chi-X Europe, which itself is merging with BATS Europe, to claim top spot in European equities.

"This is a massive, global deal. They are both big in equities and derivatives and for that reason the regulators will have to have a look at it," said Herbie Skeete, managing director at exchange research firm Mondo Visione.

But exchanges also have regulatory momentum behind them after world leaders agreed to shift as much trading in the vast $600 trillion off-exchange derivatives sector onto bourses or other electronic platforms.

"Volumes tell you that exchanges are increasing in importance with government pressure to move volumes onto exchanges. I would say regulated exchanges are in the driving seat," said David Hufton, managing director of PVM Oil Associates.

But the regulatory dust has yet to settle and experts warn that the strategic sense of where to locate some operations could change when the full picture of new rules emerges in the United States and European Union in particular.

Users will also be watching that giant bourses are properly governed and don't try to gouge them.

"The issue of holding costs down are going to be critically important," said Anthony Belchambers, chief executive of the Futures and Options Association, an industry lobby.

(Additional reporting by Emma Farge; editing by Sophie Walker)

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Comments (2)
http://pointsandfigures.com/2011/02/10/mergers-in-the-exchange-space/

this isn’t an endgame, only a beginning. endgame is when there are 3-4 large super exchanges in the world.

Feb 10, 2011 10:14am EST  --  Report as abuse
LEEDAP wrote:
This is the natural progression of an unfettered free market. Eventually a dominant player will emerge and competitive pricing pressures will evaporate. With the huge barrier to entry there will be little threat to monopolistic powers.

I wonder if the unlikely mish-mash of the NASDAQ and the CME and the LSE could provide a counter weight? If not, regulators had better intervene.

Feb 10, 2011 11:21am EST  --  Report as abuse
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