Super-Market Shopping

Flush with cash and a mandate to go electronic, stock exchanges prepare to consolidate.

The stage is set for a worldwide wave of consolidation among stock markets — it’s just the lead roles that are in question.

In March, the most sought-after target, the London Stock Exchange, rebuffed a $4.2 billion takeover bid from Nasdaq. It marked the third time in 18 months that the LSE had refused a potential suitor in favor of returning cash to shareholders. But two weeks later, Nasdaq — which has been trying to become a global electronic market for years — countered by taking a 15 percent stake in the LSE that effectively gave the exchange rights to any future bid.

Meanwhile, waiting in the wings is the New York Stock Exchange, fresh from its February initial public offering and toting more than $12 billion in market capitalization. CEO John Thain has been quoted as saying that the world’s largest exchange wants to play “a leadership role” in the industry’s consolidation. In an April regulatory filing, the NYSE also disclosed it was “in discussions with certain participants.”

One thing is certain: there are plenty of targets among the hundreds of exchanges worldwide. And while the LSE — a mecca for IPOs in recent years — may be the big prize, other exchanges are scrambling to remain in the game. In March, for example, Deutsche Boerse indicated that its supervisory board backs a merger with Euronext NV, one of its European rivals. Days later, the Australian Stock Exchange agreed to buy Sydney Futures Exchange (SFE) for $1.59 billion. After decades as member-owned fiefdoms, many of the exchanges are now “for-profit companies with the currency to make deals,” explains Michael S. Pagano, a professor at Villanova University’s College of Commerce and Finance.

What this all means for listed companies is open to debate. Invariably, consolidation will create economies of scale that will reduce costs for traders and, by extension, for companies. But it could also force difficult decisions about where to list. “Companies benefit when trading costs are contained, liquidity is available, and price discovery is sharp,” says Robert A. Schwartz, a professor of finance at Baruch College’s Zicklin School of Business. “The question is, Will consolidated markets be better markets?”

Riding the Wave

Because of the promise of electronic trading, the new exchanges will at least be more seamless. It’s no accident, after all, that Nasdaq lusts after the LSE, another all-electronic exchange and one that would give it global reach. And in the United States, the introduction of Regulation NMS — a set of rules adopted by the Securities and Exchange Commission that requires stock orders to be processed by whichever exchange can handle them electronically at the best price — is launching a race for technical superiority.

The rules effectively triggered the $10 billion deal between the NYSE and the Archipelago electronic-trading network that closed in March, and make last year’s merger between Nasdaq and Instinet much more relevant. Other exchanges are working toward meeting the requirements, which go into effect this summer. The American Stock Exchange and the National Stock Exchange, for example, are each making moves toward going public — steps that will secure capital for new technology and additional deals. And those additional combinations could very well involve any one of the numerous “off exchange” markets, such as Liquidnet and ITG’s Posit.


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