The spate of cross-Atlantic exchange mergers announced last month-both actual and possible-has industry executives thinking hard about the potential impact on investors and traders.
In particular, if Deutsche Boerse AG and NYSE Euronext merge, as has been discussed, some say investors and traders will largely benefit from lower costs and access to a wider array of opportunities for investing. The two exchanges announced they are in "advanced discussions regarding a potential business combination." At press time, no deal had been finalized.
Others have said that the announced mergers also present possible pitfalls. Fewer exchanges could mean less competition and subsequently higher trading costs. And the interests of U.S. retail investors might be neglected if the ties between U.S. and foreign exchanges grow closer.
On the positive end, as investing and trading reach across the globe, the scale of market centers with strong technology businesses becomes paramount, said Tim Mahoney, chief executive of the BIDS Trading crossing network. The New York Stock Exchange and BIDS Holdings, the parent of the BIDS dark pool, are partners in a 50-50 joint venture called New York Block Exchange, an electronic trading block facility of the NYSE.
"This is a scale business," Mahoney said. "The more transactions you can put through common technologies [the more costs are] lowered. And the extent to which you are able to have a common technology backbone [produces] tons of downstream effects that will be positive for the overall industry."
The possible NYSE-Deutsche Boerse merger comes on the heels of two other cross-Atlantic exchange deals. The first involves the LSE Group (operator of the London Stock Exchange and Borsa Italiana) and TMX Group (operator of the Montreal and Toronto stock exchanges). Second, BATS Global Markets and Chi-X Europe are also tying the knot. According to one analyst’s estimate, the NYSE-Deutsche Boerse merger has a 80 percent chance of success.
Still, if it happens, the NYSE-Deutsche Boerse merger should affect the U.S. options industry more than equities. The two market operators would combine three options exchanges. NYSE Euronext operates NYSE Amex Options and NYSE Arca Options, while Deutsche Boerse brings to the table the International Securities Exchange. According to one industry estimate, the market share of the three exchanges would climb to north of 40 percent for all equity options volume.
Many investors who have expanded their strategies on a global scale stand to benefit from the mergers, said Joseph Cangemi, a managing director in electronic sales at ConvergEx, as well as the chairman of the Security Traders Association.
"Right now, global investing is the financial juggernaut; it’s not just the U.S. anymore," he said. "And the NYSE has just completed [building] their data and network centers on both sides of the Atlantic. With the add-on of Deutsche Boerse, it further extends the opportunities for broker-dealers and end investors to leverage those facilities to access a broader mix of investment opportunities."
The mergers could also benefit traders by simplifying connections among fewer exchanges with fewer links, said Philippe Buhannic, co-founder, chairman and chief executive of execution management system vendor TradingScreen. But before those benefits could be realized, the infrastructures of the large exchange operations would have to be combined-something that will amount to an extremely complex and lengthy undertaking.
"I’ll be retired by then," Buhannic said.
Although Cangemi thinks the cross-Atlantic mergers are a positive for the industry, he has a caveat about them: They could affect the pricing of almost all products and services each market center provides. "If you reduce competition, obviously there’s less resistance for prices to move up," Cangemi said. "And that all gets passed on to the end investor."
What’s more, closer ties to foreign exchanges could pose problems for retail customers, said Chris Nagy, head of order strategy and government relations at TD Ameritrade. In the U.S. the Regulation NMS trade-through rule protects the best available bid or offer in a market. And Europe doesn’t have a trade-through rule equivalent.
"Here in the States, best execution is grounded in rules and fiduciary responsibility," Nagy said. "Europe is principles-based, mostly grounded in MiFID. And it really doesn’t put pure retail interests front and center."
(Peter Chapman contributed reporting to the story.)
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