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Although much of the merger talk is hearsay, there is evidence behind it: In April, Nasdaq made an unsolicited offer to acquire the London Stock Exchange, but quickly withdrew it. This spring, however, Nasdaq made a series of acquisitions that now make it the largest shareholder of the LSE, at 25.1 percent as of May 26. And, as Advanced Trading went to press, the NYSE made a bid to acquire Euronext. Meanwhile, Tokyo Stock Exchange (TSE) Chairman and CEO Taizo Nishimuro has indicated publicly that a merger with an overseas exchange is a possibility and that some kind of coalition, at the very least, is necessary to achieve the exchange's goal of running a 24-hour market.
Still, an overseas deal is not a given. Significant differences between the U.S. major markets and the second- and third-largest markets in the world - the Tokyo and London stock exchanges, respectively - present obstacles to any deal.London Calling
The London Stock Exchange has traded shares electronically since 1986, and since has introduced the Stock Exchange Trading System (SETS), a matching system for trading in all LSE-listed shares. Although the LSE shares electronic trading capabilities with its suitor, Nasdaq, the two markets are structured quite differently.
Nasdaq is a quote-driven market, in which brokers are obligated to post prices in order to keep the market moving. The LSE, like the TSE and most of the exchanges in Europe, is an order-driven market, in which buy-side participants sustain the market and brokers respond to incoming orders, making the popular broker practice of trading against customer orders much more difficult than it is in the United States, notes Octavio Marenzi, founder and CEO of Celent Communications. Any sort of linkup between the two exchanges would have to consider this fundamentally different approach to operations.
Additionally, off-market trading is much more common at the LSE - where up to 50 percent of the volume does not cross the SETS limit order book but instead is crossed "upstairs," among brokers, or between brokers and institutions, according to Tony Mackay, president and managing director of Instinet Europe, a major contributor of volume to the LSE - than at the NYSE or Nasdaq. Further, while both the NYSE and Nasdaq hold dominant positions in the trading of their own listings, this is not the case with the LSE. Clearly, with an LSE buy, U.S. market operators would be entering a market with a different trading culture.
A third critical difference to the U.S. markets is the practice of both the LSE and TSE of charging per trade executed, rather than per share. The U.S. practice of frequently trading small-share lots of sliced and diced block orders is discouraged by this model, Mackay notes. Commissions also are attached to the monetary value of the trade, rather than the volume, he adds.
"If you buy $1 million worth in shares, you might pay 10 basis points or $100 commission; if you do $2 million you pay $200 commission, even if the number of shares is the same," Mackay says. "If you have a high-priced stock, you pay the commission on the monetary value of the trade versus the number of shares. But it is no more difficult for a computer to match a $1 or $10 million trade."
Because of this fundamental difference, Mackay points out that any future foray by an American exchange into Europe surely will have to involve an acquisition. Nasdaq's previous attempt to enter Europe, Nasdaq Europe, essentially tried to import the quote-driven model into a very well-established and well-protected European marketplace; the underperforming operation was shuttered in June 2003.
Clearly, acquiring the LSE would not be a walk in the park - it already has rebuffed an offer from Nasdaq. But the exchange went public with the knowledge that the move would make it easier to make acquisitions and be acquired, and the process already appears to be under way.
Technical Difficulties
The Tokyo Stock Exchange - in contrast to the LSE, Nasdaq and now the NYSE - is a membership organization. This, in addition to its place in a culture that is notoriously insular, protectionist and more foreign to Americans than the U.K., presents an obstacle to American suitors, as members are likely to look after their own interests. Further, some more-immediately critical problems also have surfaced at the TSE that have dampened its efforts to issue a public offering and expand internationally.
On three separate occasions, significant technical glitches have hampered the exchange, which handled an average of 1.9 billion shares per day in April. On Nov. 1, 2005, a capacity-related issue overwhelmed the clearing system and trading had to be suspended.
