Stock Exchanges globally are Consolidating in order to cut costs and Invest in Technology that will allow them to Host as many Transactions as Quickly as possible. But is Bigger Necessarily better?
At one time, stringent regulations prevented stock exchanges from operating across country borders. Then came globalisation and together with technological advances, they ripped open the doors to the world’s most storied and impregnable stock exchanges. Decline in trading volumes and increased competition from alternative electronic platforms have prompted exchanges to combine.
Take, for instance, the New York Stock Exchange. In a world of around-the-clock trading and rapid-fire algorithmic programmes, its significance to investors has diminished. The exchange is now looking to merge with Deutsche Börse of Germany. In fact, as competition among exchanges has grown more intense in recent years, increasing hordes of investors seeking speed, lower costs and greater liquidity have flocked to electronic platforms that pay little heed to financial centres or tradition. Once mighty and powerful exchanges are under pressure to get bigger to cut costs and invest in technology that will allow them to host as many transactions and as quickly as possible. In fact, NYSE is not new to consolidation. In March 2000, Brussels, Amsterdam and Paris Exchanges led to the creation of Euronext, which in turn merged with the New York Stock Exchange a few years later in April 2007.
Deutsche Börse, which manages the Frankfurt exchange, has reportedly agreed to buy NYSE Euronext for $10.2 billion, creating the world’s largest exchange in terms of revenues, with its biggest strength in the derivatives market. With the deal in its final stages, Deutsche Börse shareholders are expected to own 60% of the combined company and NYSE Euronext shareholders taking the rest 40% stake. The combined group will have net revenues (2010) of $5.4 billion, becoming the world’s largest exchange group by revenue and with yield synergies worth $405.2 million.
There have been other prominent announcements of mergers and alliances amongst global stock exchanges in recent months. There are proposals to merge the Toronto Stock Exchange with the London Stock Exchange. In October 2010, the Singapore Stock Exchange, SGX, was taken over by the Australian Stock Exchange, ASX, in a deal worth $8.3billion.The deal is currently under review by the Foreign Investment Review Board of Australia.
The mergers show that exchanges are positioning themselves for an improving macroeconomic climate, especially after taking a major hit during the financial crisis. But what gives in this mad rush towards merging and taking over? Clearly, this fresh consolidation wave is being driven by two factors: Investors’ increasingly global view as they seek opportunities in all markets, rather than just at home, and two, fierce competition from alternative trading systems (ATS), which is putting pressure on the revenues of traditional exchanges. Unlike in the past, when exchange operations depended heavily on traders, today they’re dominated by highly sophisticated and automated trading systems.
Take, for instance, the New York Stock Exchange. In a world of around-the-clock trading and rapid-fire algorithmic programmes, its significance to investors has diminished. The exchange is now looking to merge with Deutsche Börse of Germany. In fact, as competition among exchanges has grown more intense in recent years, increasing hordes of investors seeking speed, lower costs and greater liquidity have flocked to electronic platforms that pay little heed to financial centres or tradition. Once mighty and powerful exchanges are under pressure to get bigger to cut costs and invest in technology that will allow them to host as many transactions and as quickly as possible. In fact, NYSE is not new to consolidation. In March 2000, Brussels, Amsterdam and Paris Exchanges led to the creation of Euronext, which in turn merged with the New York Stock Exchange a few years later in April 2007.
Deutsche Börse, which manages the Frankfurt exchange, has reportedly agreed to buy NYSE Euronext for $10.2 billion, creating the world’s largest exchange in terms of revenues, with its biggest strength in the derivatives market. With the deal in its final stages, Deutsche Börse shareholders are expected to own 60% of the combined company and NYSE Euronext shareholders taking the rest 40% stake. The combined group will have net revenues (2010) of $5.4 billion, becoming the world’s largest exchange group by revenue and with yield synergies worth $405.2 million.
There have been other prominent announcements of mergers and alliances amongst global stock exchanges in recent months. There are proposals to merge the Toronto Stock Exchange with the London Stock Exchange. In October 2010, the Singapore Stock Exchange, SGX, was taken over by the Australian Stock Exchange, ASX, in a deal worth $8.3billion.The deal is currently under review by the Foreign Investment Review Board of Australia.
The mergers show that exchanges are positioning themselves for an improving macroeconomic climate, especially after taking a major hit during the financial crisis. But what gives in this mad rush towards merging and taking over? Clearly, this fresh consolidation wave is being driven by two factors: Investors’ increasingly global view as they seek opportunities in all markets, rather than just at home, and two, fierce competition from alternative trading systems (ATS), which is putting pressure on the revenues of traditional exchanges. Unlike in the past, when exchange operations depended heavily on traders, today they’re dominated by highly sophisticated and automated trading systems.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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