The era of the truly global securities exchange may finally be dawning. Reto Francioni and Duncan Niederauer certainly think so. The chief executives, respectively, of Deutsche Börse and NYSE Euronext last month proposed a merger that they contend will put them in the pole position to lead a consolidation of the worldwide exchange industry. It would create the largest stock exchange in the U.S. and Europe and the world’s biggest derivatives exchange.
The proposed Frankfurt–New York tie-up came just days after the London Stock Exchange announced plans for its own transatlantic merger, with TMX Group, operator of the Toronto Stock Exchange. Meanwhile, Singapore Exchange is pursuing a $7.7 billion takeover bid for Sydney’s ASX. “This spate of merger activity suggests that to be an exchange of the future requires global ambition,” says Will Rhode, a London-based analyst at TABB Group.
But few potential combines would offer the breadth of products and geography to match Frankfurt and New York’s. CME Group’s dominance of U.S. futures trading would get a strong challenge from a Deutsche Börse–NYSE Euronext merger. Nasdaq OMX has reportedly been mulling a counterbid for NYSE Euronext, possibly in conjunction with IntercontinentalExchange, owner of the ICE futures market, but Nasdaq appears to lack the firepower to outbid Deutsche Börse. Nasdaq CEO Robert Greifeld may consider striking a deal with Singapore, whose chief executive, Magnus Böcker, headed OMX when Nasdaq bought it.
The idea of global consolidation is not exactly new. Deutsche Börse reached a tentative agreement to merge with the London Stock Exchange in 2000, but domestic opposition in the U.K. and the complications of mutual, as opposed to shareholder, ownership torpedoed the deal. NYSE Group acquired Paris-based multinational exchange operator Euronext in 2007, and Nasdaq acquired Scandinavian exchange OMX Group in 2008, but those deals pale beside Frankfurt–New York.
Technology, the growth of derivatives trading and the rise of emerging markets, particularly in Asia, are driving the merger activity. The spread of low-cost, high-speed trading technologies and the rise of high-frequency traders have transformed equity markets. New players such as BATS Global Markets, Chi-X and Direct Edge Holdings have seized market share from established exchanges.
(BATS bolstered its position last month by acquiring Chi-X Europe.) Today, NYSE and Nasdaq are each home to less than a third of the trading in the shares they list. The loss of market share has squeezed the traditional exchanges’ revenues and forced them to look elsewhere for growth. In Europe, Deutsche Börse and NYSE Euronext together would have only a 29.7 percent share of equity trading, according to Thomson Reuters.
The growth of futures, options and other derivative contracts is also fueling merger activity. Derivatives trading is growing faster than equity trading, and it’s inherently more profitable, notes Brad Hintz, an analyst at Sanford C. Bernstein & Co. A share of IBM is a commodity that can shift from exchange to exchange, but bond futures are proprietary and volume tends to coalesce at the exchange with the deepest liquidity. Deutsche Börse’s Eurex subsidiary dominates European bond futures and generated 44 percent of the group’s earnings before interest and taxes last year. That is a major reason the German company has a 60 percent larger market cap than NYSE Euronext and would own 60 percent of the combined group.
Last, the rise of Asian economies and markets is forcing exchanges elsewhere to consider mergers to gain scale. Hong Kong Exchanges and Clearing is the world’s largest exchange by market cap, at some $23.5 billion, and has led the world in IPO activity for the past two years because of its conduit to corporate China. Singapore wants to acquire ASX to bolster its position vis-à-vis Hong Kong. Combined, Deutsche Börse–NYSE Euronext would be more attractive as a listing venue for Asian companies and as a partner for Asian exchanges. “The North Atlantic market is merging to face the Asian competition,” says Georges Ugeux, chairman and CEO of Galileo Global Advisors, a New York–based investment banking boutique.
Still, the Börse-NYSE deal faces hurdles. The combination of Eurex and NYSE Liffe would control more than 90 percent of European financial futures. European regulators may also worry that the deal would inhibit competition in securities clearing. Dominique Cerutti, deputy CEO of NYSE Euronext, predicts a lengthy investigation by the European Commission.
Yet executives of the two companies express confidence of winning regulatory approval. The deal hasn’t triggered anything like the political opposition that helped undermine Deutsche Börse’s bid for the LSE a decade ago. New York Senator Charles Schumer simply called for the new entity to put New York first in its name. Mary Schapiro, who as chairman of the Securities and Exchange Commission must approve the deal, has dismissed suggestions that the U.S. is losing its stock market and said the proposed merger is “emblematic of how really global the securities markets have become.”
