Mega exchange on horizon?

As exchanges around the world pair up as if it were the high school prom, traders and investors are wondering about the timing of the announcements as well as what’s in the mergers for them.

Deutsche Börse (DB) and NYSE Euronext announced a merger agreement in February that would create a mega exchange company with a market cap of more about $24 billion just days after the London Stock Exchange Group PLC (LSE) and the TMX Group, operators of the Montreal and Toronto exchanges, announced a merger of equals.

The DB/NYSE merger is expected to be completed by the end of 2011. At that time, DB shareholders will control 60% of the company and NYSE will control the remaining 40%. Dual headquarters will be established in Frankfurt and New York.

The combined entity would include 15 exchanges, four clearinghouses and would have produced revenue of €4.05 billion ($5.4 billion) in 2010. It would create the largest exchange for stocks and derivatives in the world.

Both mergers have been approved by the respective boards of directors and are awaiting regulatory and shareholder approval.

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.”