Watchman Newsletter

Global Stock Exchanges Are Headed for Major Consolidation

CNBC (Link) - Reuters (February 9, 2011)

Germany�s Deutsche Boerse is in advanced talks to buy NYSE Euronext, and the London Stock Exchange has agreed to buy Canadian stock market operator TMX, as exchanges globally look for ways to boost their markets and cut costs.

Together, Deutsche Boerse and NYSE Euronext would dominate exchange trading in continental Europe. The companies said they could cut costs by 300 million euros ($408.7 million) a year.

The combined group would have headquarters in New York and Frankfurt, with Deutsche Boerse shareholders holding about 60 percent of the combined company and NYSE shareholders holding the rest. The companies disclosed their talks on Wednesday.

�I think these consolidations are the wave of the future�with aspects we haven�t even seen yet�once the derivatives markets are required to be more like exchanges,� former SEC Chairman Harvey Pitt told CNBC. �Securities regulators should welcome these consolidations, but competition regulators may be concerned.�

Not everyone was so enthused about it, however.

�I think it�s a big yawn,� Ken Langone, co-founder of Home Depot and a former NYSE director, told CNBC. �The listed exchanges are losing market share dramatically. They�re less relevant with electronic trading that�s now prevalent throughout the industry. It seems to me that the only sense for the merger here is to cut costs.�

Earlier in the day, LSE said it would buy TMX, forming the world�s fourth-largest exchange and a top centre for trading mining and energy shares, with $4.1 trillion of stock changing hands a year.

The exchanges are looking to regain market share lost to upstart electronic trading platforms. Other exchanges could face similar pressure to merge, analysts said.

�These mergers don�t take place on a one-off basis; they come in clusters,� said Thomas Caldwell, chief executive of Caldwell Securities Ltd in Toronto, which invests in exchanges.

One exchange seen as a possible acquisition target is CBOE Holdings, experts said.

Options exchanges have been growing fast, while stock market trading volume has been moving away from traditional exchanges and toward electronic trading venues like privately held BATS Global Markets.

�The next logical step would be for the Nasdaq or CME Group or even the ICE to take out CBOE Holdings,� said Jon Najarian, a co-founder of web information site in Chicago.

LSE shares rose 9 percent after the TMX deal was announced, which is unusual; acquirers� share prices often fall.

The rising price signals LSE could be getting a good deal, which in turn could mean another buyer might offer a higher price for TMX. But some bankers dismissed such speculation.

�You would need to put a cash bid on the table and a premium, which might require cuts at TMX, and the Canadian regulators would not like that one bit,� one banker said.

If the combination survives likely political opposition in Canada, a group will emerge with a market value of 4.3 billion pounds ($6.9 billion) based on Tuesday�s prices, with LSE shareholders holding 55 percent.

If NYSE Euronext merges with Deutsche Boerse, it will combine with one of the few major stock exchanges in the world that remain independent. Derivatives are likely to lie at the heart of any transaction. It would combine two of the world�s �big three� derivative exchanges into one new major powerhouse.

One of the major reasons NYSE merged with Euronext in 2007 was to get its hands on LIFFE, the global derivatives business that used to be known as the London International Financial Futures and Options Exchange.

It�s increasingly both the heart of the business and its most promising division. Dodd-Frank demands that trillions of dollars of derivatives currently trading over the counter will, at the very least, have to pass through clearing houses. And Europe will likely soon follow. �

America ~ Europe ~ New World Order