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Stock Exchange Mega Merger Mania

by Magnifico Thu Feb 10th, 2011 at 05:49:36 AM EST

Deutsche Börse AG, the owner and operator of the Frankfurt Stock Exchange (FWB Frankfurter Wertpapierbörse), is in advanced merger talks with NYSE Euronext, the owner and operator of the New York Stock Exchange.

The deal would create the "world's largest financial market," the New York Times reports. "Deutsche Börse would own as much as 60 percent of the new company, which would be incorporated in the Netherlands," leaving a symbolic satellite "headquarters" in Lower Manhattan for the Americans.

"Die Deutsche Börse will die New Yorker NYSE schlucken. / The German stock market will swallow the New York Stock Exchange", Der Spiegel reports.

"The global capital markets would benefit from the creation of the most efficient, transparent and well-regulated markets for issuers and clients around the world," the two corporations said in a joint statement without a hint of sarcasm.

Hooray! Just the thing to create more jobs. Another set of international financial institutions staged to grow 'too big to fail' and too big to regulate.


This news follows after Wednesday's announcement of a merger by the London Stock Exchange and the Toronto Stock Exchange's parent TMX Group.

The NYT reports:

"There is a race toward exchanges becoming ever bigger," said Elie Darwish, an analyst at Exane BNP Paribas in Paris. "This would give NYSE Euronext-Deutsche Börse an unchallengeable position."

The iconic NYSE is facing competitive pressures from electronic trading firms that have challenged its position in the market. "The New York Stock Exchange is a giant among exchanges, yet in a world of around-the-clock trading and rapid-fire algorithmic programs, its significance to investors has diminished," the NYT reports.

"The NYSE has no future solo," according to Spiegel. "Their market share is shrinking. The traditional stock trading is becoming less important... The telegenic trading floor... has long been a thing of the past and will soon disappear altogether."

Yet, the combination of the NY-Frankfurt Stock Exchanges and the London-Toronto Stock Exchanges "will create markets that control trading in companies worth more than $20 trillion, or about 36 percent of the world's stock-market value", Bloomberg reports. But, "what may prove more lucrative is ownership of growing venues for trading options, futures and derivatives whose profit margins are 57 percent more than equities at NYSE Euronext."

The deal "throws down the gauntlet to their arch rival CME Group, because it promises to create a dominant player in European derivatives as a counterweight to the CME's dominance in the US," the Financial Times reports. Nothing like greed-driven profits in the largely unregulated derivatives markets to drive the world's financial systems to brink of collapse. No worries there.

In addition to the merger being subject to a vote by shareholders of the two corporations, the Deutsche Börse and NYSE Euronext deal will face regulatory scrutiny and politics on both side of the Atlantic, the Wall Street Journal reports. In the United States, the Security and Exchange Commission will have to approve the deal for it to take place and the Department of Justice is expected to give an "extended antitrust review".

The transaction would likely also get a close review by the Committee on Foreign Investment in the United States, which is an interagency committee led by the Treasury secretary that looks for possible national-security concerns raised by transactions that give foreign entities control over U.S. businesses.

"There is very little argument or debate that the financial system has a national-security aspect," said Farhad Jalinous, a national-security lawyer at Kaye Scholer LLP. "When you're talking about the biggest stock exchange in the world, I'd not be at all surprised if the government takes the view that this is critical infrastructure."

Nah, it's not like the investment bankers would put any nation's economy in such jeopardy that it would demand the unprecedented immediate infusion of billions back by taxpayers or else they'd collapse the world economy or anything. Why would any self-respecting, so-called democracy even question such a merger?

Analysts fear "political opposition in Washington" because Deutsche Börse's shareholders would control  59 to 60 percent of the combined company, the FT reports. "'The U.S. shareholders lose their majority control,' complained the whole CNBC Wednesday," Spiegel reports.

"Exchanges are already too powerful," writes Jon C. Ogg of the 24/7 Wall St. blog. "The bad news here is that the world of financial exchanges could literally consolidate down into too few players that are too powerful. When is enough enough and when will a regulatory body out there finally recognize that large mergers are not usually that great?"

Don't be alarmed. Really this is for everyone's good. After all, Reto Francioni of Deutsche Börse would serve as chairman and be based in Frankfurt and Duncan Niederauer from NYSE Euronext would stay in New York as chief executive, according to Deutsche Welle.

There is "'good support' at the highest political level in Germany" for the deal, according to anonymous FT sources. For its part, the European Commission, the executive branch of the European Union, will likely conduct an intensive, three-to-five month antitrust review of the merger as well, the WSJ reports.

"It would be a very complicated deal likely to require a detailed Phase 2 investigation by the European antitrust regulator," said Simon Holmes, partner and head of the EU and Competition department in the London office of international law firm SJ Berwin.

For its part, NYSE Euronext is the result of the NYSE 2006 acquisition of Paris-based Euronext.

Shares of Deutsche Börse closed up 2.45 percent and NYSE Euronext closed up 14.04 percent on news of the merger talks. Good times for rich corporate investors.

News of the announcement was bumped up to yesterday, according to Spiegel, to squelch "stock market whisperers" spreading rumors and to counter the London Stock Exchange Toronto Stock Exchange merger news. "Actually they wanted to announce the coup until next week, as a fait accompli."

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But, "what may prove more lucrative is ownership of growing venues for trading options, futures and derivatives whose profit margins are 57 percent more than equities at NYSE Euronext."

Just call this new adventure "MarginQuest". Just what the world needs -- more profitable futures and derivatives trading. What I wonder is if this might be a good deal for US taxpayers. If the NYSE Euronext-Deutsche Börse is 60% owned by a German based firm who will bear primary responsibility when we have a major derivatives debacle? But then only the Germans seem to excel the Americans at sweeping problems under the rug. Merkel would likely claim that the problem was created by the Americans so they should clean it up while US politicians would say that the exchange is 60% owned by the Germans so they should fix it.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 11th, 2011 at 10:25:35 AM EST
How stupid of me to overlook the fact that the plan is to incorporate the new exchange in the Netherlands! Surely the Netherlands is better positioned than either the USA or Germany to patch up a derivatives melt-down that might be in the US$10 of Trillions exposure range. And putting the exchange in the Netherlands brings the German ownership a Dutch ally in the EU in the form of another surplus country. Surely two countries that, between themselves, have the combined experience of the Tulip Mania and the Weimar Hyperinflation will have the courage and wisdom to properly regulate the activities of this global financial exchange.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 11th, 2011 at 10:39:15 AM EST
[ Parent ]
I am not alone!

Is the Proposed NYSE-Deutsche Börse Merger All It's Cracked Up to Be?  Yves Smith  naked capitalism

The failure of exchanges, contrary to popular perceptions, is not impossible. We came within three minutes of having the Chicago Merc and likely the NYSE fail in the 1987 crash. The Merc customer was where S&P index futures traded, and a customer failure to pay $400 million meant that the Merc was similarly going to come up $400 million short on a loan it owed to Continental Illinois. The executive responsible for the account said she could not forgive the repayment. It was only by happenstance that the bank's chairman was in early that morning and authorized the credit extension, allowing the Merc to open. Had the Merc collapsed, the odds of a knock-on NYSE failure were high. The New York Stock Exchange was also at risk of not opening, and its chairman John Phelan feared if it did close, it would never open again.

One has to wonder how a merged entity would evolve, and whether the two exchanges would come to operate as a single exchange. If so, that would create all the regulatory and resolution headaches we see now with the TBTF banks: issues of lack of clarity as to which national regulator is responsible for what, with a lot of activities falling between the cracks by design of the banks, and the near-impossibility of resolving them due to the fact that their activities extend across multiple nation-based bankruptcy regimes.

Admittedly, exchanges in recent history have been more tightly regulated than financial firms, but the flip side is that their increased size and cross border operations will give them much greater ability to pressure regulators than before.

The arguments in favor of the merger all stress greater efficiency. But as any systems engineer will tell you, improvements in efficiency too often come at the expense of safety.



"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 11th, 2011 at 02:42:34 PM EST
[ Parent ]
"I don't know Icarus, but something seems familiar here."

I will imprudently predict publicly something that I only have cursory foundation to speculate upon.

This is a repeat of Mitsubishi buying Rockefeller Center immediately before the crash in '89. This is being done on presumptions of things remaining the same and being different at the same time, and every tangent being profitable to the max. The flimflam spivs behind the deal will figure the deal in such a way that they will make top of the market money on the sale and somehow repossess the assets when it collapses at pennies on the dollar...and somehow suck it dry with dividends the whole time.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sat Feb 12th, 2011 at 04:33:04 AM EST
If I were acting for the interests of European citizens, I would be very careful that they do not end up on the hook for an even larger share of losses for imploding derivatives trades.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 12th, 2011 at 07:35:59 PM EST
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