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Success and Failure in Stock Exchange Consolidations: Implications for Markets and Their Regulation

Jordan, Cally, Success and Failure in Stock Exchange Consolidations: Implications for Markets and Their Regulation (January 24, 2016). CIFR Paper No. 118/2016. Available for download at SSRN:

“The catalyst for the preparation of this working paper was the epochal merger in 2007 of the New York Stock Exchange with Paris-based Euronext, itself a consolidation of several European exchanges. Exchange mergers were not a new phenomenon; domestic and regional exchanges had been consolidating for decades. However, NYSE Euronext was the big deal, creating, for a time at least, the largest exchange in the world and linking, for the first time, the United States and Europe. The NYSE Euronext merger appeared like a bolt out of the blue, the exchanges coming together with astonishing rapidity, bedeviling and outpacing pundits and regulators alike. This was the game changer; the truly global exchange could not be far behind. Partly as a defensive strategy, other exchanges scrambled to forge alliances and a sometimes frenzied courting game ensued.  The original intent behind this project was to investigate why some consolidations succeeded whereas others failed and the market and regulatory implications of success or failure. As the research proceeded however, it became apparent that the forces driving exchange consolidations were foundering. Demutualisation had provided the merger currency and theoretically at least facilitated the process. However, demutualisation also created those pesky shareholders that could stymy the best laid merger plans. Rhetoric as to the ‘mergers of equals’, as in the Toronto-London or Sydney-Singapore merger talks, often rang hollow. After chasing the ‘big fish’ (the London Stock Exchange), NASDAQ changed course and contented itself with hoovering up little fish such as OMX and Dubai. Some exchanges (London, Frankfurt), at least at times, glorified their position of splendid isolation and old rivalries died hard. Asian exchanges for the most part, Singapore being the exception, appeared indifferent to the merger frenzy. They were not much interested in derivatives trading, one of the factors behind some merger talks. Politics inevitably played a role. Strong self-regulatory traditions could assist exchanges in sidestepping many formal regulatory impediments, but there was always the possibility of a joker in the pack in the form of ‘national interest’ concerns. Stock exchanges can be powerful national symbols, and governments reluctant to relinquish them. The ‘public utility’ function of the exchange lingered, raising concerns as to foreign ownership and control. The Australian Treasury nixed the Singapore-Sydney merger; a consortium of banks and institutional investors, calling themselves ‘Maple’, draped themselves in the Canadian flag to defeat the London-Toronto deal. The exchanges were chasing growth through diversification across product and territorial borders, in the hopes that scale would increase revenue and reduce costs. But markets were changing rapidly. The main competitors to any exchange were no longer other exchanges; rather, alternative trading platforms, more or less fancy free from a regulatory perspective, were poaching trading volume from the traditional exchanges. But the technology creating alternative trading platforms also provided alternative strategies to formal mergers and without the political headaches associated with them. The business model of the exchange was changing with the markets. Formal mergers, with their very public displays of dominance, gave way to discreet strategic alliances and compatible trading platforms. Number of Pages in PDF File: 338.

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