Merger Mania Draws Mixed Reactions

Last Tuesday’s announcement that Deutsche Boerse and NYSE Euronext are in advanced merger talks marks a giant leap in the process of stock exchange consolidation. Merger fever has broken out elsewhere, too. The London Stock Exchange (LSE) announced earlier this month that it had agreed to merge with Canada’s TMX Group, operator of the Toronto bourse, while US multilateral trading facility BATS is buying its European peer Chi-X Europe, which will result in a combined entity that will trade more European shares than the long-established LSE.

Although still subject to approval by the European Commission’s competition regulators — a process that could take up to a year, according to a top NYSE Euronext executive quoted in the Financial Times— a successful Deutsche Boerse/NYSE Euronext merger would crown a ten-year courtship between the Frankfurt and Paris bourses.

But while creating the world’s largest exchange grouping, together with the other mooted mergers, sounds like an obvious antidote to the oft-lamented fragmentation of Europe’s equity and ETF trading markets, will it work that way in practice? And will trading costs, which have been on a downward trend since the introduction of Europe’s Markets in Financial Instruments Directive in 2007 enforced competition between traditional exchanges and newer trading platforms, continue to fall?

According to David Murtagh, the Dublin-based head of European ETF trading at market maker Susquehanna, the trend towards consolidating trading venues is a positive one for the exchange-traded fund market.

“Exchange mergers could help to address the problem of fragmentation in Europe,” said Murtagh. “From our perspective as a market maker, merging listings should help concentrate trading liquidity. Even though we tell clients that the liquidity of an ETF primarily reflects the liquidity of its underlying components, in practice people do pay attention to the depth of quotes on an exchange and to exchange-based order volumes.”

Robert Coehoorn, head of ETF trading at IMC in Switzerland, agreed. “Exchange mergers are a net positive for traders over the medium to long term because platforms will be consolidated,” said Coehoorn.

Nizam Hamid, head of ETF strategy at Lyxor, also pointed to the likely cost savings that should result from the current spate of exchange link-ups.“We expect to see a closer amalgamation of trading systems and platforms and this will bring trading efficiencies for clients,” said Hamid. “As ETF trading continues to evolve, the mergers will help create a more unified trading platform for investors. However, in the short term mergers are unlikely to make much difference.”

The consolidation of trading platforms could lead to tighter secondary market trading spreads for exchange-traded funds if regulators cooperate to amalgamate listing rules, argued Bart Lijnse, managing director at Dutch market maker Nyenburgh.

“If Germany’s regulators allow their country’s ETF listings to merge with those on NYSE Euronext’s combined order book, for example, then you’d expect trading spreads to tighten. Listing fees for issuers should also decline,” said Lijnse.

“On the other hand, fewer exchanges and the resulting decrease in competition make me worry about possible increases in costs,” Lijnse continued. “We’ve already see that happening when incumbent national exchanges have lost market share in equity trading to newer platforms like Chi-X. The older exchanges have increased their infrastructure fees and the charges for market data services to compensate for their loss of market share in trading.”

In fact, some ETF issuers expressed scepticism about the assumption that the merger of national bourses will automatically result in cost savings.

“Since the London Stock Exchange took over the Borsa Italiana in 2007, we’ve seen some harmonisation in the two exchanges’ trading technologies, but there hasn’t been equivalent progress in merging the rules for listing, for example, nor on the clearing and settlement side,” said Isabelle Bourcier, head of business development at Ossiam and former head of ETFs at Lyxor. “And it is progress in sorting out Europe’s fragmented clearing infrastructure that would be of the greatest benefit to the ETF market.”

“Also, pricing policies vary widely from one exchange to another and previous exchange tie-ups haven’t led to much, if any, harmonisation in fee policies. We’re keen to see some competition remain between trading platforms, as otherwise the cost of operating an ETF range could well go up,” added Bourcier.

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