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Big Bourse Mergers are Back, But Hold the Hyperbole

Author: Benn Steil, Senior Fellow and Director of International Economics
February 14, 2011
Financial News


"The financial centre of the world is going to be New York," the American Treasury secretary thundered to his team at the Bretton Woods monetary negotiations in 1944. Henry Morgenthau would not let a crisis go to waste. "We don't want to postpone this thing another day... and maybe end up by having it in London."

The idea that the iconic New York Stock Exchange could pass into the hands of a German exchange could only have been associated with catastrophe - an Axis victory in World War II. Today, it will no doubt be spun in Washington as bracing evidence of the damage wrought to America's power and prestige by the Great Recession, which is, of course, the fault of one or the other of our two most recent presidents. But, in reality, it is just a mark of how difficult it has been in recent years for all of North America and Europe's incumbent stock exchanges to beat back competition from the likes of things with quirky names like Bats and Chi-X.

When such things began emerging in the 1990s, I argued that the national exchanges would ultimately only be able to compete by denationalising and demutualising. (Many defriended me.) Fast forward to today, and my biggest surprise is how difficult it has been for these remade franchises to slash systems costs and boost performance. Almost without exception, they are still too slow and too expensive.

Deutsche Börse, in particular, has suffered from a chronic inability to control stock-trading infrastructure costs. It is its Eurex futures franchise, which has been immune to competitive threat because of its powerful clearing arm, that has put its shareholders in the driver's seat in the proposed merger with NYSE Euronext.

The latter, in contrast, has suffered from both the failure to develop an American futures business and the failure of its European arm to wrest futures clearing away from lumbering LCH.Clearnet.

The transaction will inevitably get bogged down in American politics, and will almost certainly have to be restructured to alleviate real and imagined national security concerns, particularly in the wake of the recent Nasdaq systems breach. From both a business and political perspective, the most sensible deal would probably be one that sends Deutsche Börse's equity business to New York and the NYSE's derivatives business to Frankfurt, allowing two entirely separate legal entities to continue as before.

Pity the London Stock Exchange, which had its brief moment alone in the sun on Tuesday before being upstaged by New York and Frankfurt on Wednesday. Having never quite recovered from my country's failure to liberate Canada in the War of 1812, I am, of course, none too happy about my northern neighbour's bourse falling back into the callous clutches of the Empire. But that deal, as with New York-Frankfurt, is undoubtedly a sensible way for both parties to shed costs, and for London to bulk up its shiny new Millennium platform.

As for the LSE spinning the deal as a major play for the global resources and mining share-trading business, this no doubt jibes well with the hard asset frenzy of the times. But let's do a brief reality check.

First, no exchange has yet succeeded in achieving a meaningful cross-border sector brand. On the listing side, they are all still fundamentally geography plays. Second, listing is rapidly decoupling from trading, and blue-chip trading is where the money is. There will be declining value in grabbing new listings that ultimately trade on Chi-X and the like.

After a hiatus of many years, we've had a heady two days in the world of exchanges. Unlike the first wave of big deals in the early noughties, these two ought not conjure up visions of two or three big bourses dominating global trading. If New York, Frankfurt, London and Toronto succeed merely in cutting meaningful costs and staunching the loss of market share to upstarts, they will have succeeded beyond what any of the prior big mergers achieved.

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