Blink 'n link: stock exchanges hurry to form alliances
At the time of writing, NASDAQ is rumored to be renewing its pursuit of the London Stock Exchange (LSE). No doubt, more multi-billion-dollar, transoceanic mergers are in the pipeline. Short of marriage, though, there’s a whole lot of fun to be had. Since 2005, stock exchanges worldwide have announced more than 60 alliances, from information sharing to equity stakes, plus dozens more technology deals styled as ‘partnerships’.
These linkups pledge benefits to issuers, broker members and investors. Skeptics say most are just photo-ops; exchange officials say big changes will happen sooner than you think. Exchange allies typically dream of ‘cross-access’: letting member brokers trade the stocks listed on each other’s markets. This is still rare because of disparate national securities rules and settlement systems. Most cross-access plans have fizzled, like the Global Equity Market (GEM) trumpeted in 2000 by 10 exchanges including the NYSE, Euronext, the Tokyo Stock Exchange (TSE) and Toronto Stock Exchange.
Now the time looks right for easier access between markets. Institutional investors are flocking to electronic communications networks, which have been greased by Regulation NMS in the US and MIFID in Europe, so stock exchanges need to win them back with cheaper, easier global trading. Retail investors in Japan and Europe, who have mostly been loyal to their home market stocks, are getting more interested in foreign blue chips.
The newly transatlantic exchanges are making real progress where merely allied markets had previously failed. NYSE Euronext had to lobby hard, but it has succeeded in getting NYSE-listed companies onto its European exchanges with their existing SEC registration documents. India’s Satyam was the first to use the ‘fast-path’ process to list in Europe in January, followed by the first US-based issuer, Philip Morris International, and Anheuser-Busch.
‘Passporting’, as NASDAQ OMX president Magnus Böcker calls it, is coming quickly, though it will be mostly US-listed companies going overseas, rather than the other way around. He says NASDAQ companies may soon be passported to the Middle East via his exchange’s alliance with the Dubai International Financial Exchange, which is being rebranded NASDAQ DIFX. ‘We’re working on it now,’ Böcker promises. ‘You won’t have to wait long.’
The world’s top 50 companies, on average, have quotations in 11 countries and 26 separate markets, says Chris Prior-Willeard, vice president of innovation in the Bank of New York Mellon’s depositary receipt division. In a survey, ‘global issuers’ say they would like a single global listing. The concessions NYSE Euronext and NASDAQ OMX are wringing from regulators may help regional exchanges start to build real ties out of loose-knit alliances.
The most common alliance is a memorandum of understanding (MOU). ‘Wonderful for executives to sit down and sign with great flourishes,’ says one industry expert. ‘Mostly hype,’ says another. ‘Generally meaningless,’ Bob Greifeld, CEO of NASDAQ OMX, once famously called them.
Non-binding MOUs at least show exchanges are ‘interested in internationalizing,’ notes Benn Steil, director of international economics at the Council on Foreign Relations in New York. He suggests the TSE has been promiscuous with MOUs because it wants to attract more international order flow. An equity stake is more serious, like putting down a betting marker in roulette, says Herbie Skeete, founder of UK-based Mondo Visione, which provides exchange data and stages an annual conference in London.
Deutsche Börse described its 5 percent stake in Bombay Stock Exchange (BSE) as a ‘strategic, not financial, investment’. Singapore Exchange’s (SGX) 5 percent holding in BSE gives it a ‘foothold’ in India’s rapidly growing market, says SGX CFO Seck Wai Kwong. ‘We are continuing to explore opportunities for cooperation with other exchanges in the region and elsewhere,’ he adds.
Exchanges are biding their time with small stakes while waiting for the ‘sanctity’ surrounding national exchanges to dissipate. NYSE Euronext has staked claims in India with 5 percent holdings in National Stock Exchange and Multi Commodity Exchange, the maximum allowed, and also has a 1 percent investment in Brazilian exchange Bovespa.
Even the giant TSE could be fair game. When NYSE Euronext’s former CEO John Thain announced a hookup with Tokyo in early 2007, he billed it as a step toward a possible merger or at least a ‘capital linkage’. His successor, Duncan Niederauer, says he and his Tokyo counterpart are waiting for the TSE to demutualize and become a public company in 2009 before discussing cross-shareholding.
Publicly traded exchanges just want to make a profit. Summing up their entire strategy, Steil says: ‘The more securities you can get on a single platform, the more money you make.’ Buying other exchanges is one way to achieve that goal. Getting other exchanges to use your technology is another.
This spring Niederauer traveled to India, Malaysia, Singapore, China and Japan, among other stops. His main purpose, he recently told foreign journalists in New York, was to attract new listings. But he was also selling trading systems, with deals struck in Malaysia, the Philippines and Japan. ‘We’re fast on our way to becoming a technology company more than a financial services firm,’ he said.
These are more than just technology sales. SGX calls NASDAQ OMX a ‘partner exchange’ because it uses the same trading engine. Over 60 exchanges use NASDAQ OMX’s technology. ‘We’re more like partners now compared with a few years ago, when we had more of a vendor relationship,’ Böcker explains. ‘Technology is what glues us together – it makes it easier to connect and cooperate. It doesn’t require that we become equity participants in each other.’
Technology can also help pave the way for future M&A, however. If two exchanges use the same technology, a merger would be cheaper and easier than it would be with different trading platforms. So every time NASDAQ OMX, NYSE Euronext, Deutsche Börse or the LSE sell their trading technology, they get a leg up in the future competition for merger partners.
That race to consolidate is getting more serious as exchanges emerge blinking from a sustained industry boom and look for ways to preserve profitability, according to a new McKinsey & Co report, ‘What’s next for exchanges’. Big mergers are forthcoming, but much of the action will involve limited equity stakes, technology and, of course, MOUs. As Greifeld has so astutely pointed out: ‘Everybody cannot merge with everybody else.’
Exchanges have to be careful who they jump into bed with. If NASDAQ OMX succeeds in a new pass at the London Stock Exchange (LSE), it will find itself saddled with the Toronto Stock Exchange (TSE)/LSE joint venture of a growth market planned for Japan later this year. But the TSE previously begat a ‘working alliance’ with NYSE Euronext, and in April teamed up with it to build a single stock options market. The TSE also has a 5 percent stake in Singapore Exchange, which in turn has a 5 percent stake in Bombay Stock Exchange, as does Deutsche Börse, which was rebuffed by the LSE and looked at buying Euronext. Stitching together exchanges clearly involves some tangles.