Red Lights for Exchange Mergers

Terry Flanagan

On the heels of two failed high-profile cross-border exchange mergers, industry executives have to at least wonder if this most recent wave of trading-platform unions is over, as regulatory scrutiny surrounding these proposed deals is as tight as ever.

The successful NYSE Group-Euronext merger in 2007 set out a blueprint for cross-border exchange mergers, and declining profitability since then has provided further impetus.

Exchanges are “seeing margins collapse and market share erode,” said Joe Saluzzi, co-head of the trading desk at Themis Trading. By consolidating their operations, “they see expense savings, synergies and can merge pools of liquidity,” he added.

In addition to reducing costs and consolidating resources, transcontinental tie-ups can allow smaller exchanges to better compete with larger global players.

“There has been a change in the competitive landscape in the exchange space during the past decade or so, the main thing being with regulation,” said Michael Wong, an exchange analyst with Morningstar.

Trading is largely a fixed-cost business, so the mergers allow the combining parties to save through expense synergies. They can also diversify geographically, as well as expand their product lines.

Another consideration is that many of the larger exchange operators are shareholder-owned public companies, including NYSE Euronext, Nasdaq OMX, and Chicago Board Options Exchange.

“Their number one goal is to increase shareholder wealth, to increase the bottom line,” said Saluzzi.

Aside from prospective mergers, exchanges have been looking for other ways to cut costs while branching out and attracting more customers and trading activity.

“Exchanges are trying to be innovative, with each taking their own separate route,” said Wong. Indeed, as NYSE is building data centers with cloud-type solutions, Nasdaq has a corporate solutions business, and Deutsche Borse is operating a news-and-data business. “Each exchange is trying to go outside their formal core business of trading,” said Wong. “They’re trying to get into other niches and trying to be innovative, and developing new products.”

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