Where do exchanges go from here?

Contributor: Russ Chrusciel

When was the last time a significant exchange merger came to fruition? Over the past year, all we’ve seen is the dissolution or outright rejection of prominent merger plans by regulatory bodies.  The Australian government effectively denied a proposal to merge the Australian Securities Exchange and Singapore Exchange.  Plans for the Toronto Stock Exchange (TSX) to unite with the London Stock Exchange (LSE) were scuttled when nationalistic feeling seemingly dissuaded the necessary two-thirds of voters from approving the deal.  The most noteworthy by far – the highly anticipated cross-Atlantic “super-merger” between the New York Stock Exchange (NYSE) and Deutsche Börse – reached its own end when European regulators raised significant objections to the merged entity’s likely stranglehold on derivatives market share in Europe.

So we will see any mergers or “shake-ups” across the exchange landscape anytime soon? At this point, I don’t see evidence pointing towards much activity – and I can’t really blame most exchanges for wanting to focus on other strategic initiatives for the next 18-24 months.  When an exchange (or any company for that matter) puts that much energy, preparation and money into a potential deal only to see it rejected by a regulatory body, it doesn’t exactly inspire the exchange to pick itself up off the floor and pursue similar opportunities.  Why go after international mergers at great expense?  Your strategic fate is in the hands of regulators and governmental bodies.  Instead, pursuing targeted business activities and partnerships makes much more sense and, frankly, causes a lot less grief.  If you’re the Singapore Exchange or NYSE in February 2012, I don’t think you want to go through the hassle of a merger again for quite some time.

I also believe exchanges have been forced into the role of inflated national symbols of their home countries, fairly or unfairly, with somewhat unrealistic expectations around these exchanges’ business activities.  It is significant that the Maple Group’s offer to buy TSX came after the TSX-LSE merger plans were digested by the masses.  In one sense, the Maple Group’s type of offer seemed protective of the Canadian exchange, as if the Maple Group were saying, “Another country is NOT going to take ownership of OUR exchange.”  Similarly, Americans from Main Street to Wall Street were not comfortable with the New York Stock Exchange changing its name and relinquishing its “identity” to the German Deutsch Börse when the deal was announced in 2011.  Nationalism can and should run deep in any country.  However, over the past several months, it has proven to be more of an impediment than an aid in finalizing exchange mergers, not to mention global business as a whole.

Does this mean that exchanges should aggressively avoid mergers for the time being? The short answer is no – exchanges, like any value-creating business, need to explore combinations and structures that make sense to serve their customer needs.  That said, given the far-reaching regulatory vibe that spans international borders in 2012, more than ever, exchanges must plan for political, nationalistic and regulatory influences on their business activities.  In the near term, exchanges that desire to extend their global influence will be relegated to developing strategic partnerships with other businesses in a more targeted fashion.  This will force exchanges to truly focus on their core competencies and be more creative in engaging the wider financial marketplace. Perhaps this is not a bad thing – but instead, the impetus for the creation of adaptable exchanges that can better compete in the global arena.

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