16 May 2011

FT: Is this the wrong time for exchanges consolidation?

The withdrawal by Nasdaq OMX of its counter-offer in partnership with Intercontinental Exchange for NYSE Euronext is as stunning for its timing as well as for falling a day after another exchange combination was all but scuppered.

The London Stock Exchange is recuperating after a consortium of Canadian financial institutions on Sunday tabled a C$3.6bn ($3.7bn) bid for TMX, which had earlier agreed a tie-up with the British exchange.

More importantly, it may even be the wrong time for exchange consolidation to be taking place. In the wake of the financial crisis of 2008, regulators and market participants are struggling to figure out how market structures – exchanges, trading venues, clearing houses and banks – should best be built for a post-crisis world.

They know they must be run in a way that both safeguards the stability  of the financial system to prevent another crisis, but also allows enough competition to keep markets liquid and functioning smoothly. The question is: does allowing structures like exchanges to get bigger and more powerful achieve that balance?

"Everyone’s struggling with putting the right regulations in place for future market structures, and until those are squared away it’s going to be difficult to do any cross-border deals, particularly these megamergers", said Robert Hegarty, global head of market structures at Thomson Reuters.

Crucially, there are signs that antitrust regulators on both sides of the Atlantic have concerns about the bulking up of certain businesses and the market power they appear to have.

Joaquin Almunia said: "Competition control should ensure that the actual evolution of the market does not lead to structures that harm users and legitimate market participants. In particular, we should prevent that any one entity or group controls essential infrastructure – be it a trading platform, a clearing platform or a pre-trading service – to the benefit of a restricted few”.

This would create a near-monopoly in European futures markets, with clearing of futures contracts all taking place at the German group’s clearing house.

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