Wheatley questions the value of exchange mergers

The outgoing chief of Hong Kong regulator the Securities and Futures Commission has cast doubt on the value of exchange mergers to investors and issuers.
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The outgoing chief of Hong Kong regulator the Securities and Futures Commission (SFC) has cast doubt on the value of exchange mergers to investors and issuers.

Martin Wheatley, who is leaving his position as CEO of the SFC this summer to take the helm of the Consumer Protection and Markets Authority, one of two new UK regulatory bodies that will be established at the end of 2012, made the comments at the TradeTech conference in Hong Kong.

“It is worth highlighting that mergers of exchanges may be more than just a matter of combining businesses and it may be idealistic to assume that life would go on in the same way it did pre-merger,” said Wheatley during his speech. “The different regulatory, operational and management approach governing each entity may result in challenges pulling in different directions.”

Wheatley's comments come amid a rash of exchange mergers that are currently at various stages of approval. The London Stock Exchange is currently seeking a merger with Canadian exchange group TMX; Deutsche Börse and NYSE Euronext are trying to allay competition issues that have been raised by its merger plan; and the Singapore Exchange is awaiting approval from Australia's Foreign Investment Review Board before it can proceed with its takeover of the Australian Securities Exchange. In addition, Russian exchanges MICEX and RTS are expected to sign a binding agreement to combine in Q2 this year.

While Wheatley acknowledged the “industrial logic” behind exchange mergers, in terms of economies of scale, cost rationalisation, larger liquidity pools and more varied product offerings, he questioned whether merged exchanges are more competitive than stand-alone markets.

Citing the merger between the New York Stock Exchange and Euronext in 2007, Wheatley said that average daily turnover for the combined entity increased by 37% between 2008 and 2010, compared to 53% for the Toronto Stock Exchange, 166% for the Hong Kong Stock Exchange and 826% for the Shanghai Stock Exchange. During the same period, he also noted that average IPO funds declined by 56% on NYSE Euronext, compared to a 38% decrease in Toronto, a 25% decline in Hong Kong and a 64% increase in Shanghai.

“There are arguments for and against the consolidation of exchanges,” said Wheatley. “Much depends on the history and unique characteristics of each market, and ultimately it depends on the price, the strategic and management fit of the entire exercise. What is certain is that competition in the exchange business is getting more intense and it is wise for exchanges (regardless of whether they enjoy a monopoly status) to step up efforts to improve the quality of their services and ensure competitiveness of pricing.”

During his speech at TradeTech Hong Kong, Wheatley also spoke about regulatory change in the US and Europe, and emphasised the need for regulators and market participants to work together to ensure regulatory issues related to increasing competition between markets are identified and solved.