Exchange Consolidation Not Done

Terry Flanagan

Although the merger because NYSE and Deutsche Borse appears to be on the ropes, several deals remain on the table.

The Tokyo Stock Exchange and the Osaka Securities Exchange will hope to complete their merger by the start of 2013. A renewed sense of urgency recently came as proprietary trading systems – what alternative trading venues are referred to in Japan – reached an all-time high market share of 7.8% in 2011. The increasing competitive pressure from PTSs has been speculated as one of the main factors behind the TSE’s bid for the OSE.

“I aim to create a bourse where (not only Japanese firms) but foreign firms come, said TSE chief executive Atsushi Saito of the deal with the OSE. “A bourse loses its charm if it lacks liquidity.” Combining two major domestic players would boost the status and appeal of the venue locally as well as abroad, attracting liquidity.

While officially announced in November, the $1.7 billion deal had been brewing for the better part of a year. It’s the latest major exchange merger to surface since the wave began in late 2010 with the proposal between the Singapore Exchange and the Australian Securities Exchange. Since then, some $37 billion worth of exchange deals have fallen by the wayside. Some failed due to a lack of shareholder approval, such as the London Stock Exchange’s offer for TMX Group, while others fell from a surge in nationalistic sentiment, which occurred in Australia.

Deutsche Borse’s $17 billion merger with NYSE Euronext is in danger of being the next to fall, as European regulators fear the dominance the combined entity would have in derivatives trading. While there has yet to be any official word on whether the deal has been rejected, reports surfaced earlier in the week that the EU Commission would likely vote against it by the early February decision deadline.

In order to hasten the process, the TSE and the OSE will seek the application of a newly implemented industrial revitalization law, which helps to expedite restructurings and consolidations aimed at improving ability of Japanese companies to compete on a global stage. The combined company would be the world’s third largest exchange by market capitalization. The proposal will likely face less regulatory pressure than the major cross-border deals have. An in-country deal would be supported by domestic regulators keen to see their local financial markets more competitive on the global stage.

Closing in late December was the merger in Russia between Micex and RTS, the two largest exchange platforms in the nation. Micex, or the Moscow Interbank Currency Exchange, and RTS, or the Russian Trading System, sought the merger in a move they hope will position Moscow as an international financial center in the coming years. They will also prepare for an initial public offering in 2013.

In a smaller deal, the CBOE Stock Exchange will acquire the independent National Stock Exchange, combining two of the smaller independent stock exchanges in the U.S. Combined, the two venues account for less than 1% of all equities trading volume.

Turkey’s Istanbul Stock Exchange and TurkDex announced in November that they were working on a deal to join together.

These in-country deals show the sentiment among countries with multiple exchanges that consolidation is necessary in order to secure a place in the global exchange landscape.

“We will see more exchange consolidation going forward,” said David Herron, chief executive of the independent Chicago Stock Exchange. “We are open to it as well, but it has to be good for shareholders and the marketplace. We recognize the need to, as you see the global exchanges owning multiple platforms.”

The London Metal Exchange will likely be the next major candidate for consolidation, as its potential list of suitors has been narrowed down to just a handful of serious bidders, with CME Group, Intercontinental Exchange and the Singapore Exchange among them.

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