The following article was written by me for my magazine "FOCUS" by club ECOBIZZ of IBS, Hyderabad (ICFAI Business School, Hyderabad)
New York Stock Exchange Euronext (NYSE-E) and Deutsch Börse (DB) are amongst the biggest stock exchange companies in the world. They have recently gone into the decision to merge creating the world’s biggest stock exchange firm having presence in more than 7 countries. Indeed a super power like situation.
What are these companies? And what is it about companies running the stock exchanges? Well NYSE is the most renowned stock market in the world, tracked by millions of traders for speculating the world sentiments. Many exchanges feel the effects of the movements on this exchange. It’s the biggest market for equity trading. Listing on this bourse signifies an Indian company as a blue chip for the Indian investors. This is the might of the greatest stock exchange in the world. It has its presence in pan Europe too along with dominance in American markets. DB on the other hand is the biggest player in the derivatives market having its presence in many countries in Europe. NYSE had in 2006 beaten DB in a bid to purchase Euronext the pan European stock exchange (covering many European countries) creating a behemoth of stock exchange company. Now with the news of NYSE-E & DB merger creating the world’s biggest, largest stock exchange entity.
The $10 Billion merger controlling a $20 Trillion has all the eyes of the world markets. This merger for exchanges means a convergence of technologies and processes, improving the performance of the exchanges and reduction in costs to investors. It shall also increase the investment choices for an individual investor after the consolidation of the investment avenues. The acquisition will broaden the trading avenues by increasing access to companies listed on foreign exchanges, access to foreign markets to tap money.
Exchanges, the world over, earn money by charging a small margin on trade volume and earn profits by
charging margins on huge volumes. In this world of slim margins, even a new entrant with technologically advanced exchange can go ahead a lot further with ease and turn on profits. They will not be bogged down by outdated technology. With more competition sprucing up, the legacy exchanges are losing their market share, making it harder to get the necessary large volumes for the expected profits. The NYSE trade volumes have come down to 27% of U.S. equities, down from 90% 15 years ago. To compete with the upstarts and survive, these exchanges felt the need to combine, to diversify their geography, regain sizable market share in their trading businesses and create economies of scale that will lower their costs.
From a viewpoint of an outsider to this M&A activity, it seems to be merely the best thing that can be done for the two grand dads of the exchange economy who are struggling to remain relevant in a high-tech financial world. This M&A is a strategic bet by the two organizations to stay ahead in an increasingly global, interconnected and uniform financial market. Exchange consolidation the world over is not going to be only on a regional scale. Increasingly, the goal will be to create exchanges that span several continents and provide a single platform for trading stocks and derivatives from all over the world round-the-clock. Both NYSE and DB have products and services beyond trading, some distinct and some overlapping. They most likely would wish to consolidate common services, cut costs and take advantage of the combined customer base to give each of their businesses a bigger audience. Listing on stock exchange and settlement and clearance of trades though not high end but still provides a good amount of cash flow. An NYSE listing is still a sign of a blue-chip company that's stable and well managed. But as NYSE had outsourced its settlement and clearing operations years ago, it needs these operations to be performed in house and DB brings in this opportunity to NYSE. DB brings in the settlement and clearing business that reaches into several countries. Another complication is of equity trading and particularly in the US, is that this is a cut throat business and much of the profit is in derivative trading. In the case of the proposed DB NYSE, it is Deutsche Börse that has the most valuable derivative contracts. The most important derivative contract at NYSE Euronext is the Euribor futures which trade on Euronext and not on NYSE.
In a year or two, after the LSE-TMX (London Stock Exchange and Canadian Stock Exchange are also in the process of merger) and DB-NYSE combines and had completed the integration of their respective mergers, they will be looking at acquiring Asian exchanges to complete their global reach. Many analysts now believe that 5-10 years from now, there will probably be 4-5 global exchanges, each of which spans Asia, Europe and the Americas. It will look like the credit card industry. At that point, the Indian exchanges will have the choice between being in isolation in a merged exchange world and become a relatively smaller entity in a global exchange or start consolidation on by itself. The Indian exchanges need to act now to spearhead the formation of pan-Asian exchanges that would have much greater bargaining power during the final round of consolidation. The reason for India being capable of taking on the lead for the consolidation in Asian markets is that India is large and fast growing emerging market. Also its exchanges have world-class market design, range of derivative products, large and varied investor base, sound regulation and high liquidity.
The only concern would be an oligopoly – too much power in the hands of too few exchange firms. In that situation, markets could raise trading fees with little alternative for the investors and traders. The European monopoly commission is currently checking the merger activities of NYSE-DB to be sure that the merged entity does not affect the benefits for the market. Also another requirement for the positive outcome will be the changes in the regulatory framework for the nations containing these exchanges. With this we hope that a combined entity, originating from India or any other nation, should bring in more transparency, better investment and trading opportunities.
New York Stock Exchange Euronext (NYSE-E) and Deutsch Börse (DB) are amongst the biggest stock exchange companies in the world. They have recently gone into the decision to merge creating the world’s biggest stock exchange firm having presence in more than 7 countries. Indeed a super power like situation.
What are these companies? And what is it about companies running the stock exchanges? Well NYSE is the most renowned stock market in the world, tracked by millions of traders for speculating the world sentiments. Many exchanges feel the effects of the movements on this exchange. It’s the biggest market for equity trading. Listing on this bourse signifies an Indian company as a blue chip for the Indian investors. This is the might of the greatest stock exchange in the world. It has its presence in pan Europe too along with dominance in American markets. DB on the other hand is the biggest player in the derivatives market having its presence in many countries in Europe. NYSE had in 2006 beaten DB in a bid to purchase Euronext the pan European stock exchange (covering many European countries) creating a behemoth of stock exchange company. Now with the news of NYSE-E & DB merger creating the world’s biggest, largest stock exchange entity.
The $10 Billion merger controlling a $20 Trillion has all the eyes of the world markets. This merger for exchanges means a convergence of technologies and processes, improving the performance of the exchanges and reduction in costs to investors. It shall also increase the investment choices for an individual investor after the consolidation of the investment avenues. The acquisition will broaden the trading avenues by increasing access to companies listed on foreign exchanges, access to foreign markets to tap money.
Exchanges, the world over, earn money by charging a small margin on trade volume and earn profits by
charging margins on huge volumes. In this world of slim margins, even a new entrant with technologically advanced exchange can go ahead a lot further with ease and turn on profits. They will not be bogged down by outdated technology. With more competition sprucing up, the legacy exchanges are losing their market share, making it harder to get the necessary large volumes for the expected profits. The NYSE trade volumes have come down to 27% of U.S. equities, down from 90% 15 years ago. To compete with the upstarts and survive, these exchanges felt the need to combine, to diversify their geography, regain sizable market share in their trading businesses and create economies of scale that will lower their costs.
From a viewpoint of an outsider to this M&A activity, it seems to be merely the best thing that can be done for the two grand dads of the exchange economy who are struggling to remain relevant in a high-tech financial world. This M&A is a strategic bet by the two organizations to stay ahead in an increasingly global, interconnected and uniform financial market. Exchange consolidation the world over is not going to be only on a regional scale. Increasingly, the goal will be to create exchanges that span several continents and provide a single platform for trading stocks and derivatives from all over the world round-the-clock. Both NYSE and DB have products and services beyond trading, some distinct and some overlapping. They most likely would wish to consolidate common services, cut costs and take advantage of the combined customer base to give each of their businesses a bigger audience. Listing on stock exchange and settlement and clearance of trades though not high end but still provides a good amount of cash flow. An NYSE listing is still a sign of a blue-chip company that's stable and well managed. But as NYSE had outsourced its settlement and clearing operations years ago, it needs these operations to be performed in house and DB brings in this opportunity to NYSE. DB brings in the settlement and clearing business that reaches into several countries. Another complication is of equity trading and particularly in the US, is that this is a cut throat business and much of the profit is in derivative trading. In the case of the proposed DB NYSE, it is Deutsche Börse that has the most valuable derivative contracts. The most important derivative contract at NYSE Euronext is the Euribor futures which trade on Euronext and not on NYSE.
In a year or two, after the LSE-TMX (London Stock Exchange and Canadian Stock Exchange are also in the process of merger) and DB-NYSE combines and had completed the integration of their respective mergers, they will be looking at acquiring Asian exchanges to complete their global reach. Many analysts now believe that 5-10 years from now, there will probably be 4-5 global exchanges, each of which spans Asia, Europe and the Americas. It will look like the credit card industry. At that point, the Indian exchanges will have the choice between being in isolation in a merged exchange world and become a relatively smaller entity in a global exchange or start consolidation on by itself. The Indian exchanges need to act now to spearhead the formation of pan-Asian exchanges that would have much greater bargaining power during the final round of consolidation. The reason for India being capable of taking on the lead for the consolidation in Asian markets is that India is large and fast growing emerging market. Also its exchanges have world-class market design, range of derivative products, large and varied investor base, sound regulation and high liquidity.
The only concern would be an oligopoly – too much power in the hands of too few exchange firms. In that situation, markets could raise trading fees with little alternative for the investors and traders. The European monopoly commission is currently checking the merger activities of NYSE-DB to be sure that the merged entity does not affect the benefits for the market. Also another requirement for the positive outcome will be the changes in the regulatory framework for the nations containing these exchanges. With this we hope that a combined entity, originating from India or any other nation, should bring in more transparency, better investment and trading opportunities.
No comments:
Post a Comment