On Monday NASDAQ made a public bid to acquire the UK's London Stock Exchange (LSE). This was rebuffed by the LSE's management, whereupon NASDAQ went hostile with their bid and appealed directly to the shareholders. NASDAQ also bought on the market and raised their ownership to 28.75%. Whilst many in the City of London could see the technological and commercial synergy in such a merger (providing the Sarbanes-Oxley "by the back door" fears were allayed), there was a feeling that the bid was underpriced at 1243 pence and that 1350-1400 pence was a truer, winning price.
This was born out when both hedge funds and corporate raiders pitched in at around the 1300p mark, presumably in the expectation of a quick profit. Hedge funds now hold or control an estimated 24% of the LSE shares, and well-known corporate raider, Samuel Heyman, announced on Tuesday that he holds controlling interests in another 8.8% through LSE derivatives, thought to have been acquired at 1290p.
So where does the LSE go now? It appears that everyone believes a deal will take place and it is only the price that is to be resolved. Combining the technologies of the two organisations would make a very impressive organisation and combining London's capital raising capability with the NADSAQ's access to US liquidity creates an attractive global player. Apart from Sarbanes-Oxley concerns, of which it is to everyone's benefit to avoid, the only issue may be the debt that NASDAQ has acquired in creating this global exchange – but then NASDAQ's lenders are probably the same institutions gaining from the hedge fund investments. What goes around, comes around.
The main question, though, must be "do we need an exchange, global or otherwise?" Currencies, bonds and derivatives are far larger markets than equities and they get along very well without exchanges. Central exchanges were a logical 19th century development and it was natural for governments to ensure investor protection and efficient liquidity by forcing all trades to go via a single exchange. But the world has changed. Investors can be protected by other means, as MiFID is designed to prove, and liquidity does not need physical proximity any more. Modern trading platforms can provide a single connection to multiple and distributed liquidity pools. The only future for the LSE is to provide an unprotected global service which is better and cheaper than the alternatives, one that will compete with the combined NYSE/Euronext, the Turquoise project (Project Boat as was) where seven banks are combining to offer a MiFID-compliant service, and Equiduct, a similar service which will take advantage in the relaxed trading venue regulations of MiFID. The LSE's skills plus the expertise of a technocentric NASDAQ might just be that service.
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