The failure of a string of exchange mergers means bourses in Asia and Latin America stand the best chance eventually of consolidating, leaving their western counterparts to limit themselves to less ambitious partnerships, a new report says.
PwC, the auditor and consultancy, says in the report out on Monday that with growth in emerging markets set to outstrip the west, exchanges in Asia and Latin America would benefit.
The value of share trading in Asia grew by 20 per cent in the decade to 2010, while value in the Americas and Europe, the Middle East and Africa fell by 14 per cent and 6 per cent, respectively.
Shamshad Ali, partner at PwC, said: “Talk of an end to consolidation in the stock exchange sector may be largely true for the more mature western European markets, but Asia and Latin America are likely to see significant mergers and acquisitions in the future – if regulatory hurdles can be overcome.
“Over the next five years, significant M&A activity will be driven from the emerging markets as local exchanges seek growth opportunities outside their home markets,” Mr Ali said.
A wave of global exchange mergers kicked off last October when SGX, the Singapore exchange, agreed to combine with its counterpart in Australia, ASX.
Four months later Deutsche Börse and NYSE Euronext unveiled a $9.4bn deal to combine, followed the same week by the London Stock Exchange and TMX Group, operator of the Toronto and Montreal bourses.
Nasdaq OMX and IntercontinentalExchange (ICE), then teamed up on a counter bid for NYSE Euronext.
However, all but the Deutsche Börse-NYSE Euronext deal collapsed amid a combination of nationalist opposition in the countries of the target exchanges, and antitrust hurdles.
PwC said that the Asian exchange landscape was still limited by the lack of “cross-border market liberalisation measures” and less reliance than in the west on sophisticated electronic trading. Many exchanges in the region are also partly owned by local interests, and not publicly listed.
However, the firm said it may only be a matter of time before demutualisation gained ground and regulatory hurdles were broken down. High operating leverage and heightened competition have suppressed margins across the sector and would “continue to provide a compelling economic rationale for consolidation”.
Western exchanges could even face the prospect of becoming targets themselves, as economic growth in Brazil, Russia, India and China – so-called “Bric” countries – could fuel the emergence of a next generation of “mega exchanges” from those regions.
The report suggested that the most viable growth options for western exchanges are to focus on developing post-trade clearing and settlement capabilities or fostering ties with emerging market players.
Mr Ali said: “Traditional exchanges cannot afford to ignore the dominant role the emerging markets are likely to play in the future exchanges landscape. They will need to look closely at different models to compete against, or collaborate with, their emerging market counterparts.”