Fears that a merger of the US market's largest exchange operators, NYSE Euronext and Nasdaq OMX, would lead to imbalance in the concentration of trading volumes have been dismissed by buy-side firms contacted by The TRADE. This conclusion was reached despite the size of the combined entity. In 2010, together the two exchanges accounted for 51.75% of all reported equity trades in the US market, according to data provider Thomson Reuters.
However, recent history indicates that the resulting concentration of volumes wouldn't threaten the market, according to Brian Urey, head of Americas trading at investment manager Allianz Global Investor. “Going back a few years, before the explosion of smaller venues and dark pools, they [Nasdaq and NYSE] had a greater than 50% market share. It would just be a recovery of that which has been lost,” he notes. Moreover, the increase in electronic trading has reduced the appeal of NYSE's open outcry model as a selling point, adds Urey, “so the deal seems like a natural combination.”
Nasdaq OMX and derivatives venue IntercontinentalExchange made a joint proposal, to acquire NYSE Euronext on 1 April 2011. The bid of US$11.3 billion would surpass that of Deutsche Börse, which made its own takeover bid for NYSE Euronext on 15 February.
Under the terms of the latest deal Nasdaq OMX would take control of NYSE Euronext's stock exchanges in New York (NYSE), Paris, Brussels, Amsterdam and Lisbon (Euronext), as well as its US options and technology businesses. Where the Deutsche Börse merger focused on derivatives, the NYSE/Nasdaq deal would focus on the equities business according to a policy note written by Diego Valiante, a research fellow at think tank, the Centre for European Policy Studies.
“This is an old-fashioned attempt to strengthen well-defined and long-standing business positions and does not necessarily open new opportunities for the market as a whole,” he wrote.
Mark Kuzminskas, director of equity trading at Robeco Investment Management points out that the breadth of competition in the US market is likely to constrain any effect on trading costs. “I would feel the same way if it was 2001 when there was the Nasdaq/NYSE duopoly, but given the current level of exchange competition [an increase in fees] seems less likely,” he says. “We have 13 exchanges in the US and there is still going to be competition amongst them [if this deal goes through].”
However, there is not universal support for the merger. Keith Bliss, senior vice president and director of sales and marketing at Cuttone, a US broker with floor trading operations at NYSE, observes that the scale of trading volumes represented by the combined entity could make the bid difficult for regulators to swallow – the next largest competitor, BATS Exchange, had a market share of 11.45% of US equity trading in 2010, less than a quarter of NYSE and Nasdaq taken together.
“You not only have some anti-trust concerns with regard to trading volumes, you have a huge anti-trust concern with regard to listings,” he notes. “At that juncture you really only have one place to list your stock in the US.” The risk posed by removing a competitor as large as NYSE from the US market, says Bliss, is that it gives pricing power back to the remaining venues.
The recent proposal by alternative trading venue operator BATS Global Markets to launch a listing venue in Q4 2011 could mean that a combined NYSE/Nasdaq could face competition in the primary markets notes Kuzminskas, and Bliss acknowledges that BATS Global Markets has the size to make the business work.
Valiante supports this perspective. “This monopolistic position in the listing services is not necessarily a concern for competition, however, since the market for listing services is open to potential newcomers. In addition, the relevant market for listing services is gradually becoming a cross-border market as long as trading platforms become global players,” he wrote. “However, in the short-term, the concentration may represent a concern that US authorities need to carefully assess.”