Last week, NASDAQ, the smaller of New York’s two exchanges, raised its stake in the London Stock Exchange (LSE) to over 24%. This is below the level where a full bid would be required but, by taking up available shares and by being able to block any major restructuring, makes it very difficult for any other bidder to build a hostile take-over. What is driving this? The stock exchanges of the world have always been the scene for corporate merger and acquisition. But the ownership of the exchanges themselves was always a slow-moving and gentle area of business. Most exchanges were owned by their trading members, which limited any active dealing and kept ownership static. This is no longer the case.
Exchanges are now corporate vehicles in their own right and are fighting to both maintain and expand their businesses. The two main US exchanges, NASDAQ and the New York Stock Exchange (NYSE), share just under half the total value of global share trading between them. The next four largest players, the LSE, the Tokyo Stock Exchange, Euronext (the amalgamated French, Dutch, Belgian and Portuguese exchanges) and the Deutsche Borse, hold another 30% - that is 78% of global equity trading by value held by six players. The LSE is also on the target list of the NYSE, Euronext was considering a bid for them earlier this year and Deutsche Borse is in the advanced stages of a proposed merger with Euronext.
What is driving all this activity? On one side it is the benefits that volume can give an exchange – liquidity and cost of trading. The other side of the coin is the impact of regulations on the business. Many non-US companies have been avoiding flotations on the US exchanges due to the governance requirements, systems changes and extra paperwork required by the Sarbanes-Oxley Act (SOX). NASDAQ or the NYSE acquiring a major overseas exchange would ensure they maintained the inflow of new flotations regardless of the impact of SOX. A further regulatory impact is the EU’s planned Markets in Financial Instruments Directive (MiFID) which will drive cross-border trading, and, in the EU’s own views, increase consolidation in European trading platforms and reduce the costs. The US exchanges will want to be part of this. NASDAQ’s next moves are waited with interest. The next few months are likely to see the top six exchanges reduced to four – or could it even be three?
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