Opening Cross: When to Tie the Knot, and When to Cut Your Losses

Max Bowie, editor, Inside Market Data

Last week, the London Stock Exchange and Canadian exchange group TMX called off their engagement and walked away from a deal to create a transatlantic mega-borse to rival NYSE Euronext and Nasdaq OMX, after deciding that the deal was unlikely to attract the required support of two-thirds of TMX shareholders, following unwanted approaches from another suitor in the form of Maple Group Acquisition Corp.

Pulling out at the last minute isn’t just disappointing for the exchanges, it’s expensive, too—TMX must pay the LSE a C$10 million penalty for ending the talks, and a further C$29 million if it weds Maple in the next 12 months. We’ve taken for granted that the costs involved in mergers will result in savings for all. But what does the LSE and TMX’s parting say for the industry’s current penchant for exchange mega-mergers, and for the potential benefits or pitfalls they produce for the data world?

Pundits are apparently already lining up other partners for the exchanges left standing. But ask yourself why: exchanges seem to operate best in an environment of competition and cooperation: not necessarily as global powerhouses, but rather in the same spirit by which Nasdaq last week agreed a market data cooperation deal with Russia’s RTS Stock Exchange to help RTS accelerate market data revenues by using audit and compliance services from Nasdaq—who signed a similar deal last year with other Russian exchange Micex (IMD, July 23, 2010), which is now merging with RTS.

Meanwhile, end-users at our North American Financial Information Summit in May said they had not seen any data-related savings as a result of previous exchange mergers, despite the synergies and efficiencies promised by these deals—though firms are generally able to reduce duplicative network costs, such as those touted by Atrium Network to clients of Nasdaq’s Nordic commodities market (see story, page 3). To be sure, even for willing exchanges, standardizing technology, policies and contracts across a merged exchange group can be a major undertaking. For example, Spanish exchange group Bolsas y Mercados Españoles is only now rolling out a single data contract across its various markets. No wonder shareholder support for mergers is proving harder to obtain.

Of course, in the case of the Australian authorities nixing the Australian Securities Exchange’s deal with the Singapore Exchange, the deal was deemed not to be in Australia’s best interests, and national interest also played a role in garnering support for Maple Group’s proposition play for TMX. And while I support a country’s right to wade into matters that might affect its own markets, that doesn’t jibe with the principle of free markets that underpin exchanges.

All M&A activity should be based on sound fundamentals, with market data revenues an increasingly important component. But with exchanges viewed as national treasures, their nationality—though not their geography—must be set aside to engineer the best transactions. Imagine an unbiased process using an anonymous matching platform to identify potential partners based only on their fundamentals, not on their name or regulatory environment—much like the anonymous RFQ platform for data services being built by Rafah Hanna’s new data consultancy (see story, page 1).

But anonymity for a merger-happy exchange is like privacy for a celebrity. There’s no getting around the fact that an exchange’s brand can be just as important as its bottom line. And with “the national interest” overtaking economic interest, is the industry falling out of love with exchange mergers?

At least all seems well at NYSE and Deutsche Börse—but who can tell what goes on behind the scenes? And in the wake of other failed mega-mergers, if regulators feel it would create an unduly large or dominant market beyond the reach of competition, might they start casting an even more critical eye over such deals in future?

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