NYX-DB DEAD

• Posted by Jeff Carter
• on January 26th, 2012

The deal is dead. European regulators killed the deal. They don’t get it. They fail to see the future of finance. In a world where geographical boundaries don’t matter, the New York Stock Exchange-Euronext Liffe, DeutscheBorse ($NYX-DB) merger made good strategic sense.

Right now, regulators are still pretty ethnocentric. They consider their indigenous markets as proprietary tools. As if having the Zimbabwe Stock Exchange makes a difference in public perception.

What bureaucrats fail to grasp is capital doesn’t care about lines drawn on an artificial map. Hot money is constantly flowing around the globe seeking return. If we look at the last ten years, we can follow the trail of global hot money. First, it went into internet stocks, then real estate, followed by commodities. Currently, the hot money is sitting in US Treasuries waiting. That’s why bond yields are so low relative to the amount of money the US has been creating for the last few years. When the hot money turns, look out.

SPDR Gold Trust ETF Stock Chart by YCharts

Big moves happen.

Strategically, the merger would have put all EU interest rates on one platform. The exchanges can still create economies of scale and scope. NYX could hammer out a cross margining agreement with DB on futures, equities and options. Defacto, that would give all parties better cash management, which was one of the goals of the merger.

Regulation in the US and Europe has tilted the scale to supporting super banks. Big behemoths. The mid market bank and smaller bank has a hard time competing unless they find a niche that the big guys overlooked. In order to appease the appetites for the capital structures of the big banks, you need big exchanges for them to play in. NYX-DB realized that, the regulators didn’t.

Regulators are still stuck in the mid 1900′s. Instead of seeking ways to root out bad guys (Bernie Maddof, MFGlobal) and set regulations that level the playing field making it more competitive, they seek to control the flows of capital. Position limits, and a lot of the other misguided rules they have put forward over the past number of years are evidence of that.

Another thing that I am finding over and over again, bureaucrats of all kinds in all countries really don’t have any core knowledge of trading and how markets actually work. They do understand finance. They can drop buzzwords to lead you to believe they know what the hell is going on. However, like a military officer that has never been in battle, they don’t know what goes on in the trench.

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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.

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