M&A Activity in Exchanges Raises Concerns

As technology drives down the cost of accessing markets around the world and opens up electronic trading to a growing flood of investors, exchanges are looking at joining forces through mergers and acquisitions – such as the proposed acquisition of NYSE Euronext by the Deutsche Borse. Should the proposal be approved, shareholders of Deutsche Borse would be majority owners of the new entity which will be domiciled in the Netherlands. Replaced by high-speed technology, gone are the days of organized chaos that characterized the NYSE as portrayed in the movies, where fortunes were made or lost and market changes were greeted with human emotions of elation or despair. Some call it progress, while others express concern over giving increasing power to technology and being at the mercy of machines with less and less human intervention, opening up the possibility of disaster, as was experienced in the ‘ flash crash’ of May 6, 2010.

On the surface it may appear that this merging of resources is a good thing – shares of NYSE Euronext rose by 14 percent on Wednesday following the announcement – but some analysts are sounding a concerned warning that stock exchange mergers have serious drawbacks, such as a repeat of the flash crash scenario as mentioned above. Moreover, critics point out that stock markets are no longer fulfilling their original purpose, which was to assist small-cap and mid-sized companies to raise capital from the public to facilitate growth. Instead, increased competitiveness, and high speed technology, has exchanges focusing their energies on keeping big-cap companies satisfied, and in turn, keeping their shareholders happy. Some have suggested that to overcome this mindset, exchanges should be not-for-profit entities dedicated to serving the interests of their customers and the markets, rather than the current trend of chasing profit for shareholders.

Another merger on the cards is that of the London Stock Exchange and the Toronto Stock Exchange, the announcement of which sent shares in the LSA climbing by almost 8 percent on Wednesday. The combined group will retain their current offices in London and Toronto as joint headquarters, working as a dual stock market listing. With combined listings of 6,700 the merged exchanges will become the largest exchange measured by number of companies traded, and will have a combined worth of close to £5 billion/$7.7 billion.