At the time of his interview granted to CAPITAL ABERTO in 2007, John Thain was the NYSE CEO and chairman. The exchange had only just completed its merger with Euronext, and he discussed the future of stock exchanges in a globalized world. According to Thain, the consolidation movements would lead to a scenario comprised of few players: "I believe that on a global scale there will be about three or four major, multi–product exchanges", he said. Since then, some mergers have reinforced that view. The U.S.–based Nasdaq and Scandinavian OMX have joined forces; London and Italy have signed the papers as well. But the story’s most recent development showed that Thain’s predicted future no longer seems as likely as it did five years ago. The trading slowdown caused by the European banking crisis, plus a wave of nationalism, have been obstructing or even making unviablenew attempted unions.

The most recent "no" to a merger was given in June by the shareholders of the TMX Group, operator of the Toronto and Montreal exchanges in Canada. The group had devised a consolidation with the London Stock Exchange (LSE), the controller not only of the London exchange but also the Borsa Italiana. The plan was not approved by two thirds of the group’s investors, however, the necessary minimum quorum to proceed with the deal estimated at US$ 3.7 billion. On the other side of the world, the merger between the Australian Stock Exchange (ASX) and the Singapore Exchange was rejected by the Australian regulator. The transaction had been announced in 2010 and had even been approved by the Australian Competition and Consumer Commission (ACCC). But in April this year, Australia’s Treasurer (the local regulator) decided to veto the operation on the grounds of protecting national interest.

There’s little evidence that the mergers completed to date have brought financial benefit to shareholders

Stock exchanges are considered part of a nation’s wealth. And the Australia–Singapore case has made it clear that countries are not always willing to pay the price of foreign interference. In Canada this July, the TMX Group announced that its board of directors had authorized the company’s executive officers to study the hostile takeover proposal submitted in May by the Maple Group Acquisition Corporation, a group consisting of 13 companies in the Canadian financial sector. Though unsolicited, the offer was seen with approving eyes because it would allow the national exchange to grow without delivering its main stocks and derivatives trading market into foreign hands. "It’s a way of fomenting the local economy", observes Gilberto Biojone, a founder and member of the executive committee at International Stock Exchange Executives Emeriti (ISEEE), a group of past and present stock exchange executives from around the world.

Meanwhile, the long–anticipated union between Germany’s Deutsche Börse and the New York Stock Exchange is slowly advancing. If the operation is completed, the duo will achieve the status of world’s largest platform for stocks and derivatives trading. The Germans will get 60% of the new company. It’s not that the Americans haven’t made an effort to keep the NYSE. Nasdaq OMX and the Intercontinental Exchange (ICE), another two U.S.–based exchanges, actually joined forces to present a bid for the New York exchange, but gave up when it became apparent that the American anti–trust organization would not approve the transaction.

The way is now clear again for the Germans. In light of that, Deutsche Börse requested a study on the impact of the two exchanges’ consolidation: The Economic Impact of the Deutsche Börse–Nyse Euronext Merger on the European Financial Markets. Prepared by the Hertie School of Governance in Berlin and authored by Henrik Enderlein, a former economist with the European Central Bank in Frankfurt, the study concludes that the deal would be an opportunity for the parties to strengthen their individual markets and their respective regulatory environments, especially after the financial crisis. It would also help them regain the ground lost both to other financial hubs and to alternative trading environments such as dark pools and OTC markets.

MODEST GAINS — Apart from the barriers created by sovereignty issues, there is little evidence that the exchange mergers completed to date have brought financial benefits to shareholders. Among the larger players, the first to join forces were Euronext (which at the occasion already encompassed the exchanges of Amsterdam, Brussels, Paris and Lisbon) and Liffe, a London–based exchange specializing in derivatives. However, almost ten years into the partnership, the benefits seem limited. In 2002, the year of the merger, Euronext singlehandedly listed 1,114 companies. According to data from the World Federation of Exchanges, by the end of 2010 there were 1,135 companies in the European segment of the NYSE–Euronext – the entity created upon the merger with the NYSE in 2007.

The union with the Americans also was not fruitful for the Europeans. At year’s end 2006, the year before the Euronext–NYSE merger, Euronext recorded a net margin of 32.82%. On the following year, after the union, the new company’s margin dropped to 16.32%. The results seem much more favorable for the NYSE. Its margin in 2006 was a mere 8.62%. The numbers also took a hit from the financial crisis that hit in 2008. In 2007, the year of the merger with Euronext, the Nyse moved almost US$ 30 trillion in stocks from a total of 2,297 listed companies. By last year that volume had shrunk to US$ 17.8 trillion; the number of companies also receded to 2,238. The price of the American exchange’s own stocks also plummeted. At one point in 2007, they were worth more than US$ 100 each. The current price is US$ 24.

The LSE–Borsa Italiana merger is another example. In the fiscal year ended on March 31, 2007, the London exchange reported an operating margin of 31.63%. Over the following period, after joining the Italians, the figure rose slightly to 32.66%. By the most recent fiscal year ended in March this year, the reported margin was down to 23.18%. Nasdaq shareholders watched their results deteriorate even more severely. The exchange’s margin in 2007 was 21.22%. After the merger with OMX in 2008, the indicator plunged to 8.73%.

TRANSCONTINENTAL CHALLENGE — According to a former executive in the industry who asked not to be identified, exchange mergers may generate short–term profits from gains in scale, but the performance indicators will not always move in the same direction. "The NYSE and Euronext is one example of an exchange merger that doesn’t make sense", he says. According to him, their being located in different countries and subject to distinct regulatory and foreign exchange systems limits the possibilities of synergy–related gains in the long run.

Another aspect of mergers between exchanges in different localities is the difficult task of growing trade volumes. Just because two major platforms have melded together doesn’t mean that the number of orders will automatically increase. "The amount of money available remains the same", Biojone asserts. And behind those resources stand the asset managers who are ultimately local, despite the widespread notion that money is becoming increasingly global.

In Brazil, benefits arose from the synergies created by a merger of the derivatives–focused BM&F and the stock–trading Bovespa. Investors’ everyday operations became easier and now it’s possible to trade different securities in a single environment. The consolidation also enabled the entities to optimize their infrastructural investments. "Mergers between local exchanges are good because this type of operation requires a high investment", explains Rodolfo Amstalden, an analyst with Empiricus Research.

For the BM&FBovespa, the next step may be to advance into other countries. But some analysts prefer the strategy of increasing the exchange’s trading volumes through the agreements currently in force, as opposed to the acquisition of competitors. "Partnerships with exchanges like Hong Kong or Shanghai may be advantageous. Our investors wouldn’t buy large amounts of Asian stocks, but [Asian investors] would be interested in trading the stocks listed here", Amstalden says. "Brazil has a lot on its plate right now", adds Carlos Macedo, an equity analyst at Goldman Sachs. He believes that the present–day market shows no favorable signs that would justify new mergers. In recent statements, BM&FBovespa CEO Edemir Pinto has said that his present intention is to strengthen partnerships instead of launching into acquisitions. It is yet another indication that the predictions of John Thain might still apply, but are a long way from coming true.