BUSINESS

Deutsche Boerse Group To Merge With NYSE, Create World's Largest Exchange

02/10/2011 08:43 am ET | Updated May 25, 2011

Deutsche Boerse and NYSE Euronext's plan to create the world's largest exchange has sent competitors around the world scurrying to find partners, accelerating an industry shake-up.

Traditional exchanges are under intense cost pressure from upstart electronic rivals such as Bats Europe and Chi-X Europe which were set up by some of the world's largest investment banks to loosen the big bourses' grip on share trading.

"The smaller players have really changed the face of these larger players around the world, and so they're forced to merge," said William Karsh, former chief operating officer at Direct Edge, one of two privately-run U.S. electronic trading operators that have challenged the NYSE and Nasdaq OMX Group in recent years.

Hong Kong Exchanges and Clearing Ltd said on Thursday it would look for deals with other players after Deutsche Boerse and NYSE's announcement that they were in advanced talks to form a marketplace that would have annual trading volume exceeding $20 trillion.

The world's biggest exchange operator by market value said: "Due to changes in the financial market landscape, HKEx will consider international opportunities for alliances, partnerships and other relationships that present strategically compelling benefits consistent with its focus on markets in China."

Wednesday's news of a bid by London Stock Exchange for Canada's TMX, followed by the Deutsche Boerse talks with NYSE, revived a wave of international mergers last seen in 2006 and 2007, and shifted the process of exchange consolidation up several gears.

"The race is on to create regional trading gateways to serve international institutional investors, and the drivers are accelerating," Axel Pierron, an analyst at Celent, said.

The proposed mergers fueled a rally in shares of listed exchanges globally. Australia's ASX, which is trying to overcome domestic opposition to a $7.9 billion takeover bid from the Singapore Exchange, rose 4.7 percent.

Aggressive, upstart trading venues have eaten deeply into the market shares of these traditional exchanges, forcing the Big Board, the LSE and others to invest heavily in trading technology and to look to higher-margin areas to grow.

SINGAPORE SLING

SGX's bid for ASX faces major political and regulatory hurdles in Australia, but while many investors said the latest deals appeared to strengthen the case for the tie-up, others said the LSE could now be seen as an alternative partner.

"LSE is clearly making a play on the mining-resources side of things and Asia is in general very resource-hungry, so if Australia wasn't potentially tied up with SGX, which isn't a done deal yet, that would be one option," said Niki Beattie, managing director of consultancy Market Structure Partners.

Both the Australian and London stock exchanges have traditionally attracted a significant number of resource companies to list, including heavyweights such as BHP Billiton.

The LSE's proposed purchase of the Toronto stock market operator would make it the world's fourth largest and a top center for growth sectors of mining and energy, with $4.1 trillion of stock changing hands each year.

"Having seen so many mergers in the global market recently, Australia may better accept the prospect of being part of a larger group and it's paved the way for Australians to accept the reality of today's world," said Magdalene Choong, an analyst at Phillip Securities who has a "buy" rating on SGX.

In contrast, HKEx shares fell by the most in about three months on worries mergers would intensify competition. The Hong Kong exchange has so far avoided any moves to merge because of its strong pipeline of China-backed IPOs.

Other exchanges in Asia have been reluctant to seek tie ups due to tight ownership and political obstacles.

(Additional reporting by Mike Smith, Saeed Azhar, Kevin Lim and Rachel Armstrong in SINGAPORE, Sonali Paul in MELBOURNE; Writing by Alexander Smith; Editing by Sophie Walker)

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