Mega exchange on horizon?

LSE and TMX are both heavy on mining stocks, metals and energies, and the merger likely will strengthen their position in those sectors. Once the merger is completed, LSE shareholders will control 55% of the new company and TMX will control 45%. Additionally, the merger establishes dual headquarters in both London and Toronto.

Paul Rowady, senior analyst at TABB Group, does not expect any regulatory hold-up. “There’s been a lot of precedent now given NYSE Euronext that the national treasures will not be an impediment to having these cross-border deals,” he says.

As far as a DB/NYSE merger, Rowady says, “With greater integration and seamlessness between all that liquidity, it is conceivable that there are new strategies and trades that would become more economically viable from trading all that liquidity from one platform.”

Paul Zubulake, senior analyst at Aite Group, sees further benefits. “The end user is going to benefit by having a single clearinghouse of derivatives or listed futures in Europe and the equity options market space will probably reverse its expansion and start to consolidate,” he says.

Investment bank Keefe, Bruyette & Woods (KBW) noted in their analysis “that combining the two futures platforms and merging clearinghouses could kick off significant savings,” but added, “We believe expense synergies of €300 million ($410 million) provided by management are ambitious.” They also note that combining three U.S. equity options exchanges — NYSE Amex, NYSE Arca and the International Securities Exchange — could lead to “potential for negative revenue synergies.”

While the mergers may lead to greater trading efficiencies, Anthony Belchambers, CEO of the Futures and Options Association in London, says that lower trading costs is not a sure thing. “There’s always the tension between return to shareholders and return to customers. Who’s going to get the lion’s share of the savings? Is it going to be shareholders in terms of higher returns, or is it going to be customers in terms of reduced costs?” he says.

So far, clearing members have been quiet about the potential deal, but a merger of this size, similar to CME Group’s purchase of the Chicago Board of Trade and Nymex, holds potential for clearing efficiencies along with fear of increased pricing power by a mega exchange.

The announcements sparked a flurry of action from other exchanges, including a release from BATS and Chi-X to say their merger talks are continuing and a release from the Hong Kong Exchange (HKEx) saying they are open to talks about partnering with another exchange.

Analysts are split on whether we can expect further mergers in the near future. Zubulake holds that this is the end of a wave of mergers while Rowady thinks we may see even more. “Global consolidation of the exchanges has clearly been at play for a number of years. Chances are there are a few other combinations you could envision,” Rowady says.

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