Will we soon be trading on one global exchange?

By: ispeculatornew
Date posted: 02.10.2011 (8:40 am) | Write a Comment  (5 Comments)

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In the past 72 hours, the London Stock Exchange has announced it was “merging” with the TMX Group which includes the Toronto, Montreal and Calgary exchanges and is one of the top 10 stock exchange companies in the world. First off, just a comment. This is NOT a merger. The LSE is buying TMX group, it is much bigger by almost any mesure.They are calling it a merger for political reasons. What do I mean? Canadians do not like to have their big companies taken over by foreign ones and the best example of that was the recently failed takeover of Potash (POT) by giant mining company BHP Billiton.

In any case, that was a big deal with major implications for stock exchanges and where they are headed. But the stunning part was that news broke about a much much bigger deal as the New York Stock Exchange (NYSE) is in advanced merger talks with Deutsche Boerge AG, the huge German exchange. The German exchange is already among the 3 biggest in the world and would jump to #1 if this did go through. It is quite fascinating to see these huge exchange mergers and it certainly raises a lot of new questions…

Why are these mergers happening?

In one world – Globalization! Stock exchanges make money in several different ways:

-Trading fees (on all transactions)
-Listing fees (for companies to become listed)
-Maintenance fees (for all participants)
-Data services (sold to institutional clients, media, etc)

The world used to be a much simpler place. Take the Toronto stock exchange. Just 5 or 10 years ago, it was a given. Canadian companies would become listed in Canada, be traded on the Toronto stock exchange only, etc. In fact, just 3 years ago, the Toronto stock exchange had a 95% market share. But many new participants have started offering faster, more efficient and cheaper alternatives and the market share is already down to 64%. Amazing isn’t it? It is happening all around the world as exchanges compete for trading volume and listings. It is now fairly easy for companies to choose where they want to get listed. But even more important, trading a stock like Potash can be done on a multitude of stock exchanges at the same price. That is competition at its most intense as exchanges fight for tiny fractions of pennies per trade, for speed measured in milliseconds, etc.

How has it changed? Because most of the volume is now traded by High Frequency traders. These traders can switch all of their volume away in a split second from one exchange to another depending on what is offered to them in terms of speed, fees, etc.

Will these consolidations continue?

I have no doubt that they will. Why? Because while there are differences between markets, things that are developed for one exchange can often be used on another opening possibilities of large scale cost savings.

So are we headed towards one huge exchange?

I personally do not think so. A lot more exchanges are being created these days that each have a different purpose and Canada…

I think that this new world will have a few mega exchanges that will be alliances such as the NYSE-Deutsche Borse with hundreds of smaller players.

What do you think?

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5 Comments

  1. Comment by Zavi — February 10, 2011 @ 2:04 pm

    Pros: Stronger! Faster! Bigger!! I think that’s good.

    Cons: Political and technology challenge, the integration will not be that easy. Will see how it goes!

    Question: Seems that Quebec’s (province of Canada) securities watchdog has the power to block any proposed merger between LSE and TMX Group???

  2. Comment by John — February 10, 2011 @ 2:07 pm

    But do you think that globalization of stock markets will also mean contagion in international financial markets?

    Thanks!

  3. Comment by GMO — February 10, 2011 @ 2:25 pm

    It was BHP Billiton that tried to buy Potash Corp., not Rio Tinto. Good point though – if they’d said BHP was merging with Potash Corporation, it would probably have been received better.

  4. […] Will we soon be trading on one global exchange? « Intelligent … […]

  5. Comment by open source portfolio — February 14, 2011 @ 10:12 pm

    I think the problem is not integration but monopoly. They can charge pretty much anything they want and the cost will be passed to us.

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