Friday, September 21, 2007 10:14:08 AM
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Stock exchanges
Ringing the exchanges
Sep 21st 2007 | NEW YORK
From Economist.com
Rival stock exchanges are busy swapping stakes
INVESTORS may be forgiven for their confusion over the latest round of cross-border share trading among financial exchanges. Five exchanges—stretching around the globe from America to Europe and the Middle East—announced a series of moves on Thursday 20th September that, if approved by regulators, will dramatically change the ownership structure of the world’s leading bourses. Whether the shifts result in better service for the customers of the various exchanges involved remains to be seen. What those exchange users want, in the end, is lower costs and access to the biggest pools of liquidity.
NASDAQ, an American exchange that was previously frustrated in its attempt to take over the London Stock Exchange (LSE), is at the heart of the deals. If all goes ahead, NASDAQ will suddenly find itself in a slew of foreign markets, and with a big new shareholder to boot. NASDAQ had recently turned its attention to OMX, a Nordic exchange operator, only to face a counterbid from Borse Dubai, a recently created firm backed by the government of the Middle Eastern emirate.
This week the rivals struck a compromise of sorts: NASDAQ will gain OMX, while Borse Dubai takes most of the American exchange’s stake in its London rival (NASDAQ will retain a 3.5% of its 31.5% holding built up while manoeuvring to take over the LSE). Meanwhile, the two will also swap stakes in each other: Borse Dubai will take a 20% share in NASDAQ, while the American exchange will take 33% of Dubai’s International Financial Exchange, which controls Dubai Bourse. The new firm will be renamed NASDAQ DIFX. They say the combined entity will expand into other regions as well.
The LSE has spurned a string of takeover offers in recent years. Despite the remodelling and consolidation that has gone on among the world’s other biggest exchanges the LSE has always insisted that it can go on alone. It may succeed in its aim. Dubai's Middle Eastern rival, Qatar, announced that it had also bought a 20% stake in the London exchange. The investors from the Middle East may well turn out to be passive and indeed block the ambitions of other exchanges with an eye on the LSE.
The exchanges say customers are driving these sorts of deals. With the explosive growth of hedge funds, there is rising demand for cross-border, cross-asset trading. Technology—of the sort that OMX sells to many financial exchanges around the world—is making such complex deals possible. The rise of multi-asset trades was a keen topic of discussion this week at an options industry conference in New York, where NASDAQ—already with an important role in stock trading—discussed its plans to become the seventh American equity-options exchange.
Politics could play an important role in the success of the proposed slew of exchange deals. Charles Schumer, a member of the Senate banking committee from New York, has already questioned the proposed ownership swap between NASDAQ and Borse Dubai, which would make the Middle Eastern group the largest shareholder in NASDAQ. Last year Mr Schumer joined a firestorm of criticism over the purchase by another Dubai group of six American ports (they were later sold on to another American firm).
Regulators in the various countries involved will also have to approve the complex web of transactions. Although capital flies around the world at the touch of a button these days, regulators are still rooted firmly at the national level. This makes sense: they are in effect charged with striking the appropriate balance between the interests of “Main Street” and Wall Street. Given the complexity of the latest transactions, it is likely that the job of sorting out exactly where the balance of those interests ultimately rests in this case could take some time.
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