Fair exchange? Transatlantic mergers spark era of bourse wars

THE axis around which the globe's stock exchanges revolve has tilted once again, leaving trading operators scrambling to find their place in the shifting landscape.

Proposed multi-billion pound transatlantic tie-ups led by Germany's Deutsche Borse and London's LSE have unleashed a wave of merger speculation that has driven shares in some quoted bourses to record highs.

Meanwhile, those operating under other forms of ownership have been left examining how best to prepare for the next wave of consolidation.

The London Stock Exchange, which on Wednesday said it would merge with Canadian counterpart TMX, will become the senior partner in what would be the world's fourth-largest stock exchange by revenues. What would have been a landmark announcement in its own right was quickly eclipsed by confirmation that Deutsche Borse and NYSE Euronext are in advanced talks to create the world's largest securities exchange group.

Consolidation is being driven by pressure to increase reach in global markets, as exchanges try to keep pace with the increasingly boundary-free nature of international money movements.

Traditional bourses also face increasing competition from exchanges in booming emerging markets, as well as new start-ups on their own doorstep. In the US, the Bats platform set up in 2005 in Kansas City claims a 10 per cent market share in equity trading. Meanwhile, Europe's alternative Chi-X bourse now ranks second only to London among the continent's largest exchanges.

"The truth is, sitting around and relying on your home market will not lead to growth, particularly in the downturn that we are just coming out of," said one analyst. "There has got to be more global reach."

Analysts say the Deutsche Borse and LSE deals both make strategic sense, though other factors will come into play.

The nationalist backlash that has stalled Singapore's 5.2 billion bid for the Australian Securities Exchange could well be repeated elsewhere.

There is already some unease in Canada that the all-share deal with the LSE could siphon away control, listings and associated work from Toronto and Montreal.

"We are going to take our time to study the details of this transaction to be sure that this meets Quebec's economic needs," finance minister Raymond Bachand warned last week. "We need to be sure that access to capital is maintained for Quebec businesses, if not improved."

Some segments of the US population will likewise resist foreign ownership of the country's iconic "Big Board". In typical fashion, the New York Post proclaimed: "Achtung! Germans taking over NYSE". Business presenters on CNBC greeted ing viewers the following day with a "Guten Morgen Wallstrasse".

Should both deals come to fruition, there is little doubt that the combine of Deutsche Borse and NYSE Euronext would be in a stronger position than its British-Canadian counterpart.

The exchanges would have a combined market capitalisation of 12.5bn, putting them on par with Chicago Mercantile Exchange owner CME Group and Hong Kong Exchanges & Clearing (HKEx), whose value has surged on the back of its connections with China. LSE-TMX would be about one-third of its size.

In terms of the value of equities traded, Deutsche Borse and NYSE's Euronext exchanges in Paris, Brussels, Amsterdam and Lisbon collectively account for about 3.5 trillion in European shares, compared to 2.1 trillion on the LSE.

A merger of the German and US exchanges would also put the combined group at the forefront in derivatives trading, an area where activity is being driven by regulatory efforts to clean up in the wake of the financial crisis.

Euronext's Liffe and Deutsche's Eurex are Europe's two largest futures exchanges, and though the creation of an effective monopoly could attract regulatory scrutiny, the combination would be a powerful one.

The LSE, which missed out on buying Liffe in 2001, hopes to make up ground by using TMX's Soma trading platform for a pan-European push into derivatives.

Once the dust in Europe and North America has settled, attention looks most likely to shift to Asia, where markets have been more buoyant due to less fall-out from the financial crisis.

Not all in the region appear ready to enter the bourse wars. The head of the Tokyo Stock Exchange said last week that he had no plans for structural tie-ups while the bourse remains unlisted. However, market giant HKEx issued a statement indicating it was prepared to play ball. "Due to changes in the financial market landscape, HKEx will consider international opportunities for alliances, partnerships and other relationships that present strategically compelling benefits consistent with its focus on markets in China," the statement said.