An industry expert has identified four trends that are propelling the mergers and alliances among some of the world's top stock exchanges: automation, consolidation, internationalization and deregulation.
"These trends are accelerating faster [than ever before]," Pace University finance professor William Freund told the mid-summer conference of the Security Traders Association in Chicago.
Citing the four trends collectively calling them ACID, the acronym formed out of their first letters Freund warned that they will determine "the winners and the losers among stock exchanges."
"This is a game that will never end completely," Freund said. "There will be tough battles ahead. There will be winners. There will be victims. There will be new markets competing, markets that perhaps are only now on the drawing board."
Lou Klobucher Jr., chief executive of Chicago Stock Exchange specialist firm Dempsey & Co., told the STA conference that exchanges need to understand the challenges they face, "and the declining advantages they possess."
"This requires understanding of broad trends in the industry, the explosive growth of corporate equity markets, and the equally explosive growth in trade volumes," he said.
Asset Appreciation
Meanwhile, as stock exchanges in the U.S. and abroad go courting each other, a more fundamental trend stands out: institutional and retail investors scouring the globe for asset appreciation.
Even though trans-national stock purchases are subject to the economic vagaries of each region, most experts agree that investors are eyeing opportunities outside their domestic borders.
Foreign investors were heavy purchasers of U.S. equities in the first quarter, at a pace exceeding the total bought in every year except 1997, according to the Securities Industry Association.
The purchasing of foreign securities by U.S. investors during the same period, however, slowed to the lowest point in the 1990s, though U.S. investors have renewed their interest in emerging markets, the SIA said.
Talks and rumors of talks among stock exchanges worldwide is indicative of how investors' capital is swirling about the globe.
Globally, Nasdaq and the Deutsche Borse, the German stock exchange, have proposed a joint marketing and listings arrangement. The London, Frankfurt and Paris stock exchanges are planning a Pan-European alliance.
Domestically, exchanges are also tieing the knot.
The National Association of Securities Dealers, for instance, is merging with the American Stock Exchange, and will be joined by the Philadelphia Stock Exchange.
The Chicago Board Options Exchange and the Pacific Exchange have an agreement in principle to merge.
Freund told the STA Conference: "Markets like the AMEX and the regional exchanges are feeling a great profit squeeze, and at the same time political pressure from their members."
As the automation of trading heats up, he said, technology costs have escalated. "These consolidations will, in the end, bring about fewer and larger surviving markets."
Monetary alliances most notably the European Monetary Union, which takes effect January 1 will spur the international consolidations, Freund said.
The Euro
Freund believes the alliance of the London, Frankfurt and Paris stock exchanges will be London's entry ticket for the planned European currency, the euro, and that the New York Stock Exchange may soon form a partnership with the Paris Stock Exchange. "Location is not nearly as important as it used to be," he said.
Globalization may ultimately render domestic regulations less relevant, unless regulators can internationally agree on some new ground rules.
"Some of the bureaucrats are realizing that fact," Freund said.
Strategy
More than ever, stock exchanges across the globe need to prepare strategically for the bout of alliances ahead, Klobuchar told the STA conference.
"I would refer to our present situation as a strategic inflection point,'" Klobuchar said. "We are at a time of life in the business when our fundamentals are about to change."
Klobucher said the changes compel exchanges to understand their competitors, "whether those are other exchanges, the third market, newer alternative trading systems, not to mention other investment vehicles and foreign countries."
"It requires, as never before, that the exchanges understand who their customers are, and who they want their customers to be," he added.
A telling sign of the torrid bull market is the aggressive efforts by stock exchanges to gain market share over their rivals.
Klobucher said that to increase their market share, exchanges must first provide unique advantages to customers, such as superior transaction and execution services.
He said market share is a better measure of an exchange's success than trade volume.
"Market share is a more discerning, maybe more brutal measure, because it tells you how you stack up to the other choices," Klobuchar said. "To remain viable, much less successful, exchanges must be driven for market share as are the companies with which they trade."
"In a period of explosive and unprecedented growth," Klobuchar added, "you would hope any exchange traded more volume this year than last, more last year than the year before."
