Global stock exchanges have apparently entered into a new round of consolidation that promises to radically alter trading activities for millions of investors.
Last week, the London Stock Exchange (LSE) said it would merge with Toronto’s TMX exchange in Canada, potentially creating the world’s dominant mining and energy company bourse, as well as the world's fourth-largest exchange, with $4.1 trillion of market value.
Soon afterwards, Germany’s Deutsche Boerse and the NYSE/ Euronext exchanges confirmed they were in “advanced talks” related to a merger.
The combined entity would boast annual trading value of $20-trillion.
In addition, there’s the long-running saga of the Singapore stock exchange (SGX) seeking to take over the Australian Stock Exchange (ASX) – a $7.9-billion bid that has thus far failed to hurdle political and regulatory opposition Down Under.
However, some analysts think it is only a matter of time before the Australian exchange agrees to merge.
Having seen so many mergers in the global market recently, Australia may better accept the prospect of being part of a larger group and it's paved the way for Australians to accept the reality of today's world, said Magdalene Choong, an investment analyst at Phillip Securities told Reuters.
A spokesman for ASX told reporters: the developments overseas do underline the global trend towards exchange consolidation in response to the dynamic changes that are shaping the market.”
Australian regulators remain unconvinced.
“We are talking to politicians, trying to explain that they are not 'selling the business,' they are expanding the business and the markets, leveraging on Asia's growth, said Magnus Bocker, the Singapore Exchange chief executive.
Even Hong Kong's stock exchange -- the world's largest exchange operator by market value -- put itself in play, announcing it is open to new international alliances, given the stiff competition it now faces from smaller trading pools in East Asia.
Due to changes in the financial market landscape, [the Hong Kong exchange] will consider international opportunities for alliances, partnerships and other relationships that present strategically compelling benefits consistent with its focus on markets in China, the exchange said in a statement.
For the moment, Hong Kong hasn’t made any definite plans as it still enjoys strong revenues from a brisk pipeline of China-based IPOs.
Why this flurry of merger activity among the big equity exchanges?
For starters, globalization, deregulation and technological advances have allowed smaller trading vehicles to enter the market – at much lower cost.
Small over-the-counter, electronic trading exchanges -- like Bats Europe and Chi-X Europe – have sprung up all over the place, pressuring the bigger exchanges to reduce trading costs.
Consequently, these new trading venues have taken away market share from the big established exchanges, leading the latter to invest in new technologies in order to exploit higher-margin activities.
Indeed, Deutsche Boerse and NYSE Euronext said their proposed merger would cut costs by 300 million euros ($400 million) each year.
One such big-profit trading activity has to do with derivatives – i.e, where traders bet on the future prices of various assets.
Indeed, data from Bloomberg suggest that due to increased regulation, margins generated for stock trading at NYSE amount to 35 percent, versus 55 percent for derivatives.
In fact, NYSE and Deutsche Boerse have stressed that once they combine, the will become the world’s dominant derivatives trader.
The competitive threat from alternative trading pools makes strategic sense for traditional exchanges to combine resources so they can compete better, said Neo Chiu Yen, Asian equity analyst at ABN AMRO.
Moreover, trading volumes for traditional activities are declining.
The smaller players have really changed the face of these larger players around the world, and so they're forced to merge, William Karsh, former chief operating officer at Direct Edge, a private U.S. electronic trading operator, told the press.
“It’s all about cutting cost,” said James Cox, managing partner at Harris Financial Group, in Colonial Heights, Va.
“Smaller exchanges can execute trades at much lower cost; the big bourses need scale to bring down trading costs and become more competitive.”
Cox cautions that the mergers of exchanges will likely be more of a benefit for traders – particularly, short-term traders – rather than for the listed companies.
Global stock exchanges actually underwent a wave of consolidation before, during 2006-2007. But Cox indicates those mergers occurred for different reasons.
“Those mergers were done in response to the competitive challenges posed by the Chinese and East Asian exchanges which were seeing huge boom in IPOs and M&A activity,“ he said.