Deal-making by both the London Stock Exchange (LSE) and Nasdaq-OMX hit snags this week on concerns over sovereignty and competition, leaving room for speculation that Nasdaq will now bid for the LSE.
A takeover bid by a the “Maple” consortium of Canadian financial institutions could well block the LSE’s bid to merge with the TMX Group, owner of the Toronto Stock Exchange.
Canadian regulators have been concerned about losing control over a key element of the country’s financial architecture, and analysts believe that they will favor the bid by the Maple Group – consisting of Toronto Dominion Bank, the National Bank of Canada, Bank of Nova Scotia and Canadian Imperial Bank of Commerce, as well as five pension funds – over that of the LSE .
The LSE has reiterated its desire to push through a deal with TMX, which would create the world’s largest platform for the listing of natural resource companies, as well as a formidable junior market.
Nasdaq-OMX has also been thwarted in its joint attempt with the Intercontinental Exchange to block Deutsche Boerse’s buy-out of NYSE-Euronext with an $11 billion counterbid, after the US Department of Justice said that a merger between the two main US boards would be anticompetitive.
If the Canadian counterbid for the TMX Group succeeds, it would leave both the LSE and Nasdaq-OMX looking at a dwindling supply of takeover targets, a situation that analysts say could drive the two to revisit an earlier failed merger as the rationale for international consolidation within the industry grows stronger.
It would also leave the LSE isolated in Europe and competing with a trans-Atlantic behemoth. A combined Deutsche Boerse and NYSE-Euronext would command access to the major US and European markets and a considerable amount of the derivatives marketplace.
“Why we’re seeing this consolidation trend is because exchanges are competing for international institutional investor flow, and eventually by being isolated and only allowing access to a limited number of securities that are listed on the LSE, which are UK-listed equities, I think eventually that is going to diminish the value proposition of the LSE,” Celent analyst Axel Pierron told CNBC.com.
“If you are an institutional investor, what you are trying to do is to go through a platform that gives you access to a wide gamut of securities that you can trade with a single framework and a standardized approach, which obviously reduces cost,” Pierron explained.
National incumbent stock exchanges are being squeezed as competition for international liquidity intensifies. The creation of new “multilateral trading facilities” (MTFs) such as Chi-X and BATS, has taken liquidity from the major bourses. A new regulatory focus on derivatives trading is adding to exchanges’ difficulties.
The European Union and the US have made a greater focus on derivatives clearing and trading a key part of their post-crisis regulatory agenda, with the European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Wall Street Reform and Consumer Protection Act likely to push the industry towards centralized clearing and electronic trading.
This could provide a boost for the LSE, should European regulators come to the conclusion that a merged NYSE-Euronext and Deutsche Boerse holds too much of the clearing space, according to Niki Beattie, founder of Market Structure Partners and former head of market structure at Merrill Lynch.
That need for scale and international scope could now lead the LSE back to Nasdaq. In 2006, then CEO Clara Furse rejected Nasdaq’s overtures, and the US exchange ultimately fulfilled its desire for a European presence by acquiring OMX, the Nordic exchange group.
A deal may now look more attractive for both parties, Pierron told CNBC.com.