02/11/2011 04:50 pm ET Updated May 25, 2011

A New Paradigm for Stock Exchanges?

The almost simultaneous announcement of a possible merger of the New York and German Stock Exchanges, following last year's announcement of the merger between Singapore and Australia, is changing the financial landscape.

If the NYSE and Deutsche Boerse go ahead, it is a unique revenge of history: Deutsche Boerse tried to purchase Euronext, but Euronext chose to take a bit from the NYSE instead. It was a phenomenal deal for the NYSE but a mistake by Europe, which did not express an opinion on the alternative. Now, Deutsche Boerse, which weighs almost twice the market capitalization of the NYSE, is in the driving seat. By simultaneously absorbing the NYSE and Euronext, it will be able to merge the former LIFFE with its world derivatives leader, Eurex.

The London-Toronto deal is closer to a merger of equals and they have virtually no joint business to integrate: it is a pure cooperative approach. The combined entity will benefit from a $50 million reduction in costs. The addition for LSE is Montreal's derivatives Exchange. The combined Exchanges will weigh $7 billion against $24 billion of the NYSE-Deutsche Boerse, if it goes through.

The interesting observation is that Toronto and New York chose to go transatlantic rather than American. Would there have been more synergies between TMX and NYSE? Certainly. But there would probably be a loss of identity for Toronto that the Canadians might not like.

The NYSE-Deutsche Boerse transaction might shock American observers: the reason why the German Exchange is so much bigger is not the trading of equities. In that specific field, the NYSE will remain the dominant player by a substantial margin. But Deutsche Boerse has two large businesses: a derivative exchange (Eurex) and a post trade activity (Clearstream). There is therefore no risk that the NYSE equities activities might be dominated by Frankfurt or Paris, who are decisively smaller.

This leaves NASDAQ in the cold, as possible prey for the Chicago Mercantile Exchange if they ever want to go to the cash market.

Europe is now fully integrated around these two alliances. Only Madrid remains fiercely independent. The Spanish Exchanges would be a great target for Bovespa who now weighs $16 billion, and is the third largest Exchange in the world, the second being the CME ($20.3 billion) while Hong Kong now leads with a $25 billion dollar market capitalization.

The big unknown is now Asia. Hong Kong will be larger than NYSE-Deutsche Boerse, which is a sign of the evolution of global market values. There is no way a pure market transaction can be contemplated with Shenzhen, Shanghai, Hong Kong, Bombay or Tokyo. Will they consolidate within Asia or remain independent?

These transactions will change the landscape of the Northern Atlantic equity trading businesses. It has become a commoditized business where Exchanges can only make money by reducing costs. The competition of non-regulated trading platforms has lowered the fees to a level where it becomes difficult to be profitable.

While I don't expect any fundamental resistance against the Toronto-London transaction, NYSE-Deutsche Boerse will be scrutinized. Will the US authorities let the iconic NYSE fall under the control of Deutsche Boerse? Will the European authorities accept a dominant European player in derivatives, equities and post trade services?

Let's hope that they all understand that this is the North Atlantic preparation of the Pacific competition.

To be continued....