The recent contagious outbreak of M&A activity in the exchanges world may be the logical continuation of a broader trend towards global link-ups and consolidation, but the scale is unprecedented. The implications for competition and regulation, in the European and US markets in particular, are huge.
These moves are, in part, a result of the threat to traditional exchanges posed by new electronic rivals brought into existence by legislation designed to encourage inter-platform competition. Fortunately for traders and investors, such tie-ups could lead to more efficient, liquid markets as activity concentrates in a smaller number of venues.
But there are dangers too; the benefits of reducing fragmentation are finite, and excessive consolidation will damage competition. Regulatory bodies, with whom approval for the proposed deals ultimately lies, must allow for the benefits offered by larger, more efficient exchanges without forfeiting rivalry.
This could be tough when the process of consolidation shows no sign of stopping. Since London Stock Exchange’s announcement of an offer for Toronto Stock Exchange owner TMX Group and the confirmation of Deutsche Börse and NYSE Euronext’s merger plans, there has been a frenzy of rumours, announcements and speculation on potential tie-ups between bourses across the globe.
Nasdaq OMX and IntercontinentalExchange are reported to be in talks, and several others have made it clear that they are open to international alliances. Even SIX Group CEO Urs Rueegsegger, who recently insisted that Swiss Exchange is not for sale, qualified his comments with an admission that if all of the proposed mergers do take place, the bourse may reassess its position.
Precisely how these international conglomerates will be governed must be addressed. Any exchange with a global presence will, of course, fall under the jurisdictions of several regulators, and be required to operate in accordance with foreign legislation. Regulators may also have concerns about the extent that their will can be imposed when revenues from trading carried out under their stewardship could flow to a recipient subject to different requirements.
Whatever the situation though, political concerns should not be allowed to cloud regulatory judgement. The prospect of the New York Stock Exchange having owners in Europe has raised hackles in the US, for example. But if the global securities markets are better off as a result, then flag-waving should not be allowed to get in the way.
