Contributor: Jeffrey Wallis
What do banks, airlines and exchanges have in common?
Every country wants one.
Based on signals coming from country regulators and politicians, it seems that exchanges have become the crown jewels of nationalistic pride, as they are the prized gem at the center of a country’s financial and capital growth. The desire to protect exchanges as sovereign assets is causing nations to be cautious of recent exchange merger activity and contemplate the potential risks and challenges of consolidated markets.
One example is the Australian government’s rejection of the Singapore Stock Exchange/Australian Stock Exchange merger, which signals a concern for the impacts of exchange consolidation. The same sentiments are being whispered throughout political channels in the Canadian and US governments as well. Given the Maple Consortium’s recent challenge of the LSE takeover of the TSX, the rise of nationalist pride in Canada is no longer confined to the public sector. Although, nationalism is not the only reason to resist consolidation as demonstrated by the US government’s rejection of the NASDAQ/ICE bid to acquire the NYSE.
Initially this bid was considered popular because it aligned with the nationalistic agenda, but the US government’s view that concentration of risk – particularly settlement risk and the potential of creating the mother of all “too big to fail” entities – was not an acceptable option. This sets the stage for the EU and German regulators to evaluate whether they are willing to concentrate risks in a combined Deutsche Bourse/NYSE exchange and create even tighter connections to the US economy.
Considering these concerns, exchanges should look no further than another industry to offer guidance on strategy: the airline industry. Airlines have long been the symbol of national pride for many developing nations and oftentimes kept under close governmental supervision. Such supervision makes it extremely hard for the airlines to participate in any level of global consolidation as experienced by most private industries, much like the resistance exchanges will face.
However, such resistance did not keep the airline industry from creating the next best thing: global frequent flyer alliances. These alliances created marketing agreements to share data, routes and customers as well as distribution channels establishing a global network to satisfy customer demand. Exchanges are now facing a similar situation, needing to expand distribution to satisfy the capital needs of their customers. Strategies are already being developed for these marketing and distribution agreements to be put in place. The large exchanges are creating expanded networks into the emerging markets, where shared technology and telecom agreements are starting to take shape.
Among the examples that are reminiscent of the airline industry and its preceding alliance strategy towards large scale consolidation, are the interest by the Hong Kong Stock Exchange and the Taiwan Stock Exchange to enter into strategic alliances; the existing strategic alliance between the NYSE and Tokyo Stock Exchange; and the growing number of network agreements between the large flagship exchanges and emerging markets.
While the momentum around exchange consolidation may be slowing, the underlying strategy can still be achieved if both exchange and government leadership are open to learning from other flag-waving industries. At some point, governments will focus on the next chief concern and give exchanges some latitude to create real economies of scale. But for now, it will be just as good to keep your Sky Team, Star Alliance or One World customer loyalty cards on hand.