Two Down, One to Go

Back in April when Nasdaq OMX and the IntercontinentalExchange (ICE) announced their—ultimately unsuccessful—bid for NYSE Euronext, I wondered whether exchange operators had reached their maximum size.

Speaking about the failed TMX–LSE vote, Robert Young, CEO of Liquidnet Canada says there are really only two ways to raise shareholder value through an exchange merger: Either increase top-line revenue growth by introducing new markets, or reduce bottom line costs by eliminating duplicate costs.

The business case for the TMX–LSE merger definitely would have been the latter. Once an exchange operator has its finger in its own equities, futures and derivatives markets, it's difficult to introduce new products through a merger.

Now the LSE Group faces a challenge, as most large exchange operators have decided to remain standalone businesses or have found their dance partners, like NYSE Euronext and Deutsche Börse. Perhaps the LSE could establish a strong Asia-Pacific presence by merging with the Singapore Exchange (SGX).

In the meantime, the pool of potential merger partners is shrinking fast. Over the past few years, the smaller national exchanges have banded together to compete with their larger rivals. In Europe, the industry has seen Austria, the Czech Republic, Hungary and Slovenia form the Central and Eastern European Stock Exchange Group (Ceeseg). In South America, Chile, Columbia and Peru joined together for cross-listing issues. And even in Asia-Pacific, Malaysia, the Philippines, Singapore and Thailand are working out the kinks in sharing cross-border liquidity.

If the LSE Group is looking for a partner, it will have to act fast. There was a rumor floated a few months back that it could look to acquire Nasdaq OMX after its TMX Group acquisition. Maybe it's time to pick up that phone, Xavier.