01.26.2018
By Rob Daly

OPINION: Transatlantic Exchange Deal Not in the Cards

There is nothing like rumors to move the market. Earlier this week, the British financial press reported that The CME Group of the Intercontinental Exchange might make a bid for the LSE Group, the London Stock Exchange’s parent company.

Fuelling this speculation were comments from Chris Hohn, manager of The Children’s Investment Trust, that consolidation in the exchange sector was inevitable, reported Sky News and other outlets.

It might have been the case a few years ago when management of the LSE and Deutsche Börse began discussing their “merger of equals.” It had been rumored that each US exchange operator also wanted to make a bid on the LSE, but nothing ever came of it. It was most likely a business ploy to increase the premium that the Deutsche Börse would have had to pay if the deal went through.

If the deal took place today, which of the exchange operators would be the likely suitor?

The CME Group and ICE have grown through acquisition, but ICE has far more experience.

The CME Group went through a spurt of purchases starting with The Chicago Board of Trade (2007), The New York Mercantile Exchange (2008), and, most recently, The Kansas City Board of Trade (2012). All of them have been futures markets that integrate well with the CME Group’s core business as a designated contract market.

However, since its rivals, Cboe Global Markets, the ICE, and Nasdaq, have expanded beyond their historical core businesses into other markets, this could be the CME Group’s last chance to one-stop shop for similar diverse revenue streams.

The ICE, on the other hand, has not met a market that it did not like. It started with the procurement of the International Petroleum Exchange in 2001, which then it followed by the purchases of New York Board of Trade (2007), Winnipeg Commodity Exchange (2007), Climate Exchange (2010), NYSE Euronext (2013), and Trayport (2015). More recently, the exchange operator acquired Standard & Poor’s Securities Evaluations and the National Stock Exchange via NYSE in 2017.

Given the number of diverse business lines that the LSE Group has, the ICE would seem to be the likely candidate due to the historical behavior of its management.

Of course, this is if the regulators would even agree to any transatlantic deal.

It’s doubtful that regulators would let the CME acquire the LSE Group without having the LSE divest itself of the LCH. There would be too much concentrated risk if the three clearinghouses serving the US became two clearinghouses.

The ICE may face less regulatory hurdles than the CME Group, but what would be its motivation? The ICE already has a firm footprint in the UK; transaction-based businesses are money pits, and it is not like there is a fire sale happening. If anything attracted the ICE’s attention, it would be the LSE’s data and index businesses. But does it make sense to purchase an entire exchange group simply for one business unit?

The day of mergers between the largest exchanges is over. The regulatory issues regarding competition and consolidated risk will keep the status quo.

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