No April Fools' Joke: Nasdaq OMX, ICE Want NYSE Euronext

In what NYSE Euronext CEO Duncan Neiderauer no doubt hopes is a big April Fools’ Day joke, Nasdaq OMX and the IntercontinentalExchange (ICE) announced today a $11.3 billion offer for NYSE Euronext.

This certainly throws a wrench into the proposed NYSE–Deutsche Börse merger, announced earlier this year.

It also leaves me wondering, however, if this exchange merger-mania has gone just a little too far and if the industry is at the point where the leading market operators are too large to merge further. I remember a few years ago some experts were speculating that eventually the globe would be served by only three or so global exchange operators. Is that what the industry truly wants?

It is true that liquidity begets liquidity, but taking that to the logical extreme, the most liquid market would be a single monopolistic market. Considering regulators’ concerns with systemic risk these days, it seems better to put the industry’s eggs into more baskets rather than fewer. I’m not sure if either deal will be approved by regulators. Just look at some of the major, but not exhaustive, business lines each candidate currently runs.

Deutsche Börse: Deutsche Börse (European equities), Eurex (European futures), International Securities Exchange (US options) and Eurex Clearing (clearing)

NYSE Euronext: NYSE Equities (US equities), NYSE Amex Equities (US equities), NYSE Arca Equities (US equities), Euronext Equities (European equities), NYSE Amex Options (US options), NYSE Arca Options (US options), NYSE Liffe Futures/Options (European futures and options), NYSE Liffe US (US futures), and NewYork Portfolio Clearing (clearing)

Nasdaq OMX: Nasdaq Stock Market (US equities), Nasdaq OMX BX (US equities) Nasdaq Options Market (US options), Nasdaq OMX PHLX (US options), Philadelphia Board of Trade (futures), Nasdaq OMX Nordic Equities Markets (European equities) Nasdaq OMX Baltic Equities Markets (European equities), Nasdaq OMX Commodities Europe (European Commodities), and the International Derivatives Clearing Group (clearing)

The IntercontinentalExchange: ICE Futures US (US futures), ICE Futures Europe (European futures), ICE Futures Canada (Canadian futures), ICE Futures OTC (energy and credit default swaps) and ICE Clear US (clearing), ICE Clear Europe (European clearing) and ICE Clear Canada (Canadian clearing), and ICE Trust (clearing)

Each party has gone on the record about how a tie-up with NYSE Euronext would benefit shareholders and help cut costs via various business and technological synergies. However, any resulting organization would wind up as the dominant market in the US or the EU—depending which suitor wins.

With Deutsche Börse, the new organization would have the majority of the listed futures trading in continental Europe, while a merger with Nasdaq OMX and ICE would create large markets in the US. Nasdaq OMX would wind up with approximately half of the displayed equity in the US market and more protected quotes than anyone on Wall Street as well as close to half of the US options markets. ICE would get a bigger footprint in Europe and some additional US businesses, but not enough to dominate Eurex or the Chicago Mercantile Exchange (CME).

One thing is sure: If the Nasdaq–ICE deal wins out, all that infrastructure standardization and consolidation that NYSE Euronext has developed over the past several years would most likely end up on the ash heap as Nasdaq would move everything onto its Inet platform.

Another interesting thing to watch, if it happens, is the integration of Nasdaq OMX’s market service business and NYSE Technologies. The two commercial service arms of the exchange operators seem very complementary. NYSE Technologies provides all the services leading up to the matching engine, while OMX focuses on developing matching engines.

The person having the best laugh at this April 1 announcement is London Stock Exchange (LSE) Group CEO Xavier Rolet. In recent weeks, unnamed sources claimed that after LSE Group merged with Canadian markets operator TMX Group, it would look to merge with Nasdaq OMX, leaving TMX Group as a third wheel in the operation. With this latest news, it is highly doubtful that the LSE Group would have the stomach, or a deep enough purse, to acquire Nasdaq OMX now.