With Big Bang and the introduction of electronic trading the exchange’s role as the figurehead of
With Big Bang and the introduction of electronic trading, the exchange’s role as the figurehead of the City ended. More recently, the growing powers of the Financial Services Authority have seen the LSE’s regulatory functions massively diluted.For all the change going on around it, the LSE retains a stranglehold on equity trading in London, one of the world’s most attractive financial centres. Overseas rivals covet access to its users, and can see rich pickings by trading in a wider range of international equities from a single trading operation. At the centre of any plan to merge two stock exchanges would be the goal of closing one of their technology platforms, and shunting all equity dealing through the surviving kit.So high are the fixed costs of maintaining dealing platforms, the merged group might find it more cost-effective to shut both and develop a new one altogether.
This is not the sort of ambition that can be achieved through a mere joint venture.A merged exchange’s greater bulk would enable it to offer users a deeper pool of liquidity. That is attractive because large trades would be less likely to have an impact on the prices of the shares being dealt.Moreover, an enlarged exchange would also possess an advantage over rivals in attracting companies looking to float. While the so-called new issues market has been more or less dead for the last year, it is already beginning to show signs of life.Robert Mumby, an analyst at HSBC, said: “The LSE is under pressure – only a little – from shareholders to do some sort of deal. The value of the cost savings involved means that it really has to look at all the possible deals very seriously.”Manus Costello, an analyst at Merrill Lynch, said the LSE could present compelling synergy opportunities to a partner. He said: “We think the LSE has every right to consider itself the partner of choice in Europe.”However, there would be considerable obstacles to a deal.
National equity markets operate under contrasting regulatory schemes, and it is not immediately obvious who would be responsible for regulating, say, a transatlantic equity market. It would be interesting to see the US Securities and Exchange Commission sit down with the UK Financial Services Authority to debate the matter.According to one analyst, questions about how to establish a uniform set of regulations for the enlarged group are the “single biggest obstacle” to an LSE deal.Then there is the question of harmonising different clearing and settlement regimes. It is an arcane topic, the central issue being whether they should be owned by the exchanges that use their services. The LSE has long argued that there should be independent settlement houses that compete among themselves for business from exchanges.So who are the runners and riders? Leaving aside Dubai, the most frequently touted partner is the Nasdaq.
