LSE and TMX merge-UPDATED, NYX and DeutscheBorse, As the Exchange World Turns
- Posted by Jeff Carter
- on February 9th, 2011
The London Stock Exchange and the Toronto Stock Exchange have agreed to merge. The LSE was always a bridesmaid and never a bride in the heated merger and acquisition activity once exchanges went public. The LSE was the apple of many a stock operators eye, especially the NASDAQ. Out of the blue, the TMX gets it done.
It is a friendly merger and will create seventh largest exchange in the world by market value. The rules and regulations on both sides of the Atlantic have hurt stock exchanges. Dark pools are sapping their liquidity. It is logical for them to merge to try and cut costs by merging.
Eventually, when all the M+A is finished, there will be 3-4 worldwide exchanges. It will look like the credit card industry. But, because of money,regulation, and government borders it takes time. One advantage to this merger is the similarity in securities law between Canada and Great Britain. The only fly in the ointment is the pesky cultural issues with Quebec wanting to preserve its French language heritage. It wasn’t a problem for NYSE-Euronext, but sometimes the French can be “more French” when they aren’t in France!
We have seen two combinations in the past year. ASX and SGX merged to create a interesting entity in Asia, and now another pan Atlantic exchange. There are now three pan Atlantic exchanges, NYX, NDAQ, and LSE+TMX. These combinations should eventually be very advantageous for companies. Eventually, rules will be harmonized and it will be easier for companies to raise growth capital. The globalization of the marketplace is driving this change.
Growth areas for the newly combined entity should be in the derivatives space. Canada is commodity rich. The newly combined exchange ought to be able to figure out a way to leverage that. If the rules and regulations allow, it might be innovative to see a mining futures contract that interfaces with a mining stock ETF. TMX is heavy on mining companies and 34% of the FTSE 100 is made up by mining and energy companies.
The question always is who’s next?
In looking at logical combinations, and at the roster of the world’s biggest exchanges, it would not surprise me to see the Intercontinental Exchange ($ICE) make a move. Their business dovetails in an interesting way with this new combination. It would create the third largest exchange based on market cap and give the combined entity a spot in all four of the entries of finance; Stock, Options, Futures and OTC.
Another side note, Tom Kloet, the President of the new entity was once CEO of SGX. When he was CEO there, he did a lot of innovative things in India, and actively worked with leaders in that country. He also combined the stock and futures exchange in Singapore. Unfortunately, India was just coming out of hibernation. Now, their stock market is beginning to grow. There are cultural similarities between India and Great Britain. Down the road, it would not surprise me to see Kloet be a catalyst for some sort of TMX+LSE+BSE combination. At the very least, Mr. Kloet knows who to call and how to get it done.
The CBOE ($CBOE) is still sitting there, alone. I don’t see any active potential suitors in the near term for them.
Another chapter in “As the Exchange Turns”.
Trading in New York Stock Exchange ($NYX) and Deutsche Borse (DB) shares are suspended. Pending merger announcement? That merger would create a pan-Atlantic dynamo in Equities, and Futures. Would be a possible threat to the Chicago Mercantile Exchange($CME) and their Treasury complex.
The CME emptied its cash balance as of it’s last earnings report. Lower cash balances make the price of acquisition more expensive. There are no likely buyers of CME. Rumors of a CME/CBOE tie up are always out there, but it doesn’t look like a good strategic move for CME at this time. If NYX and DB tie up, NDAQ and CME might start talking.
Strategically, and NYX+DB tie up is interesting. NYX owns the short end of the european yield curve via Euronext and the Euribor contract. DB owns the long end via the Bund (Eurex). They will be creating a similar treasury complex that the CME has with US treasuries. Also, three of the largest stock markets get together. There are economies of scale and scope there.
Out of the major exchanges that are left, the Nasdaq ($NDAQ) looks like it needs to make a move. A tie up with either ICE or CME would be its best move. CBOE is out in the air as well. Like NASD, ICE and CME, CBOE is literally a one trick pony. Moves by other exchanges might force consolidation in this group.
NYX and Deutsche Borse acknowledge they are talking. They may have just begun speaking today after the TSX, LSE merger was announced. That combination was sort of out of the blue.
All exchanges are higher on the news. The ones with the power to buy, or at least the track record are CME, ICE and NASD. Out of those three, CME and ICE have the most capability. Jeff Sprecher of ICE is an executive that has a lot of creativity.
When an exchange buys another exchange, it’s not a lot different than businesses combining. Sometimes you buy to consolidate operations and get economies of scale. The CME-CBOT merger is a perfect example of that. Sometimes it’s cheaper to buy the business than develop it yourself, ICE buying the NYBOT is a good example. Sometimes you buy exchanges to get their technology, NASDAQ buying OMX is a good example of that, and possibly CME buying NYMEX although CME paid way too high a price to get the business. CME buying NYMEX is a perfect example of an exchange making an emotional strategic decision that wasn’t a good financial one.
With the mergers going on in the stock exchange sector, both the New York Stock Exchange and the Deutsche Borse must have felt some pressure with the announcement that the LSE was gone. While the LSE doesn’t do the lion’s share of volume it is perfectly positioned globally. Because of how the world turns and time zones, London will always be a center of trading activity. The LSE has historical significance as well, and competed very hard for IPO’s out of eastern Europe. The trick was navigating British exchange security law, and regulatory agencies to incorporate the LSE.
The worldwide financial crisis ended exchange consolidation. The fact that we have had two, and potentially three mergers in the past six months means that the world financial footing is looking a lot better. We probably have seen the worst, although there are still a lot of headwinds and problems ahead. The seas of finance could get really rough again, but I doubt seriously if it will come from the private sector. It’s actual governments and their level of debt/spending/taxation is what we worry about.
The most important thing in an exchange merger is to cut costs, and get scale. Without those two things, any exchange merger falls on it’s face. Another thing to look at is regulation, and taxes. For example, if CME were to merge with someone and were able to take their headquarters via merger to better tax treatment-that becomes interesting.
The Stocktwits stream is on fire with talk about CME-CBOE merging, as are private trader message boards in Chicago.
Without looking at finances too heavy, let’s explore the strategy. As I tweeted, “Confucious say, Just because the fruit can be picked doesn’t make it ready to eat.”
CBOE is the top option exchange in the world. (They are SEC regulated.) But why? One, they were first and there are a lot of network effects that come with that. Second, they own some spectacular contracts. VIX, SPX other indexes. They have good technology. What are their downsides? Fungibility. Doesn’t matter where you trade listed options. If the SEC would change regulations on fungibility, CBOE is worth triple or more per share. They have a trading floor that is empty, except for the proprietary contracts they trade.
What would CME Group see in them? CME is CFTC regulated. There may be some synergies between CME’s equity contracts, CME’s purchase of the Dow Jones, and the CBOE. But what price are those synergies worth? CME has been terrible at wringing out synergies between CBOT, NYMEX and CME (and BM&F) on the front end trading. What makes anyone think CME purchasing CBOE would be any better? Remember, there are also cost increases of having to answer to two regulators. Dodd-Frank is only going to increase those costs.
There are four aspects to finance when it comes to trading. Cash Equities, Cash Eq. Options, Futures, OTC. CME dominates futures. CBOE is powerful in options, but PHLX and ISE also are pretty tough players-which will combine under a NYX-DB deal. NYX and DB also combine their futures division.
CME might be better off doing a deal with NASDAQ, or trying to integrate ICE. ICE integration reinforces dominance in futures. CBOE is tantalizing, but the price CME would have to pay might be too high. Plus, there are no tax benefits to buying CBOE. Currently, CBOE is trading below their IPO price.
I don’t discount a CME buy of CBOE, but I don’t think the synergies are immediate, nor is the scale increased.
Nice to see Abnormal Returns
thanks Emily Lambert of Forbes for the link, welcome to her readers
tip of the hat to Seeking Alpha
welcome NY Times Dealbook readers
no secret if you read the about me, but I am a shareholder in CME Group.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)