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What do stock exchange mergers mean for investors and the market?

Monday 14 February 2011 - by John Barker and Vlad Khandros

John Barker and Vlad Khandros of Liquidnet examine the future for stock exchanges in the wake of last week's announcements of proposed mergers between the London Stock Exchange and Toronto TMX and Deutsche Boerse and NYSE Euronext.

What do last week's announced mergers mean for institutional investors? At first, not a whole lot. In the past few days we have seen the list of major exchange groups potentially decline by two. On the surface these look like good moves from a diversification standpoint in terms of geographies, services, and asset classes for the exchanges themselves.

But there is little evidence these cross-border deals will provide material benefits to institutional investors beyond some potential reduction in fragmentation. The financial details of these deals are well covered by the sell side and others so we'd like to delve into what these announcements actually mean for the market - especially institutional investors.

We anticipate some major debates from local governments given Canada's recent rejection of the Potash deal and Senator Schumer's public work with the NYSE for example. Also, Eurex is jointly owned by SIX and Deutsche Boerse, which can make parts of this deal more challenging to execute on.

Exchanges in developed markets have seen significant market share erosion and have had their best customers turn into their toughest competitors. In the US, the NYSE and NASDAQ only trade about one of out every three shares in their own listings, with the rest traded away by competing exchanges, ECNs, and ATSs.

Market share for the TMX and LSE is higher relative to NYSE and NASDAQ as of today, with each still controlling the majority of the volume of their listings, but it is eroding rapidly.

It is not clear to us how these deals will bring back market share or even help to reduce market share losses. Dual listings are an opportunity, as they carry additional fees and the ability to trade from time zone to time zone in a more seamless fashion.

But the bigger benefit to the exchanges in doing these deals is improving economies of scale in a very competitive business by consolidating technology and spreading those fixed costs across a larger base of global order flow - NYSE has been public with estimates of approximately $410m in cost savings from this deal.

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