The Exchange Merger Arms Race

Few can have missed the announcement that the proposed merger between ASX and SGX is about to be halted by Wayne Swan, Australia's Treasurer. He cites the deal as contrary to the national interest which, of course, has been a concern raised by the Canadian authorities in their review of the proposed merger between their own TMX Group and the London Stock Exchange.

I wonder if it's complete coincidence that both Australia and Canada are in particularly sensitive political waters right now. The Australian legislature effectively suffers from a hung parliament and Canada faces close elections too. The challenge for the politicians then is that for the man on the street these deals do look like a sell-off of national assets and so there is little political capital to be gained by approving them.

On the other hand, a look at the reduction in the domestic shares of the LSE or TMX tells another story. The ASX, too, will face competition from Chi-X later this year and so all these venues run the risk of being increasingly marginalized. Now is the time for these exchanges to bulk up and form global alliances as it's unlikely they will reverse their domestic fortunes. The concept of a national stock exchange may fast become a quaint anachronism as capital markets continue to globalize at an ever-faster rate.

When the financial regulators of these countries first introduced their domestic exchanges to the concept of competition, they should have understood that the current wave of mergers was going to be an inevitable consequence. Why should stock exchanges be any different from airlines, automobiles or pharmaceuticals which have all globalized to meet the practical realities of their industries?

Steve Grob is director of group strategy of Fidessa where he writes a regular blog on the Fidessa Fragmentation Index.