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Consolidation of stock exchanges as a tool to control the global financial system
Material posted: -Publication date: 29-09-2009

The growth of national and global financial markets; the current technological changes and increased competition among infrastructure organizations in the stock markets (traditional exchanges and electronic trading platforms), as well as the erosion of national borders for financial markets, which means increased cross-border competition of financial infrastructure, put new challenges in front of national stock markets in the conditions of financial globalization.

In the new environment of special value was gained by economies of scale, since it requires substantial investments in technologies that provide competitive advantage, and also, ceteris paribus, issuers prefer a more deep and liquid markets where they can attract the maximum amount of capital at minimal price. Respectively, began to develop the trend towards consolidation of exchanges, which began with the national level.

In Europe, almost all countries dominated by a single stock exchange or the holding of national stock exchanges (the German exchange in Germany, the Italian stock exchange in Italy, holding Spanish exchange in Spain, etc.). In addition to the horizontal associations of stock exchanges, such national holdings, generally include the exchange trading in derivative financial instruments, as well as other infrastructure institutions (clearing and Depository company, etc.).

This trend has spread to other regions. National holding company originated in Canada group (Toronto stock exchange). In the Asia-Pacific region joined forces to exchange most major stock markets: Hong Kong (holding Hong Kong exchange and clearing company the Hong Kong Exchange and Clearing Limited, including the Stock exchange of Hong Kong, Hong Kong futures exchange and Hong Kong clearing company), Australia (Australian stock exchange and Sydney futures exchange), Korea (Korean exchange formed by the merger of the Korean stock exchange, Korean futures exchange and the Korean Association of stock market participants) and others In South Africa in 2001 occurred the absorption of the Johannesburg stock exchange South African futures exchange.

Only the most large and somewhat isolated stock markets are the USA, Japan and China allow you to have several stock exchanges, although actually setting duopoly (with the exception of Japan, where the predominant volume of trade on the Tokyo stock exchange, in the U.S., the market share of the new York stock exchange and NASDAQ, and in China - Shanghai and Shengenskaya stock exchange). But even here the increased competition, including from the electronic trading platform, leads to significant changes. So, March 7, 2006, completed the merger of the new York stock exchange and electronic stock exchange Archipelago Holdings, Inc., in which there was the privatization of the new York stock exchange and a new company - NYSE Group, Inc. NYSE Group, including the new York stock exchange (NYSE) and NYSE Arca (formerly the Archipelago exchange and the Pacific exchange). This merger is all the more significant that reflects the consolidation of the leading traditional exchanges and electronic trading platforms.

In late 2006 ended the rivalry between the two Chicago exchanges, trading in derivative financial instruments. Chicago Mercantile exchange (Chicago Mercatile Exchange - CME) announced the acquisition of its competitor - another of the Chicago stock exchange Chicago Board of Trade (CBOT). This will allow CME to become the world's largest stock exchange, trading in derivative instruments. Although both the Chicago Board of exchange is urgent, the emphasis is different. Both exchanges operate with futures/options on interest rates and stock indices, but the CME is working with futures/options on foreign currencies and raw materials, and the SWOT with agricultural and energy futures/options trading. If U.S. regulators approve the merger, the transaction will be completed in mid-2007, the combined company will be called CME Group.

However, in the context of globalization consolidation at the national level for active participation in global competition is not sufficient. Stock exchanges are forced to enter the markets of other countries, to expand its operations and diversify its. There are various options for expansion outside the national market: merger or acquisition with foreign trading platform, open its trading platform abroad, providing services of foreign trading platforms, the cooperation with other stock exchanges (for individual projects or broader).

One of the first striking examples of the formation of large regional stock market due to the merger of several national stock exchanges was the formation of the European exchange Euronext, bringing together the markets of France, the Netherlands, Belgium and Portugal and included in its holding, the London stock exchange for derivatives trading LIFFE (now Euronext.liffe). Initially, the Alliance was created with the signing of an agreement between the Paris, Amsterdam and Brussels stock exchanges. This resulted in a pan-European exchange EURONEXT NV, in which occurred the integration of trading, clearing and settlement systems of stock or commodity markets of the three stock exchanges. Euronext has become the first international exchange in the world, the members of which were fully integrated and the markets are transformed into a single system. An important role was played by monetary integration in Europe - the introduction of a single currency, the Euro. In 2002 was opened a branch of the Portuguese stock exchange - Euronext Lisbon as a result of accession to the holding of the exchange BVLP.

Active development of the processes of cross-border mergers on the stock market of Northern Europe. They began with the establishment in 1998, the stock exchanges of Copenhagen, Stockholm and Norex Alliance, which later joined the rest of the Nordic exchange, and later exchanges of the Baltic States. The Alliance aims to close the integration: it has standards of membership and common rules of trading. Subsequently, as a result of mergers in Northern Europe, the consolidation process was institutionalized through the establishment of the holding company OMX, which now operates in Stockholm, Helsinki, Copenhagen, Reykjavik, Tallinn, Riga and Vilnius. It controls about 80% of the securities market of the Nordic countries and the Baltic States. On the trading platform OMX - SAXESS - conduct their trades and other members of the Norex Alliance, not part of the group OMX, in particular stock exchange of Oslo. In addition, OMX has its own niche, in which the holding company takes one of leading positions in the global marketplace - providing technology solutions to exchanges of other countries. It supplies software to more than 60 exchanges in 50 countries of the world.

For example, OMX and Singapore Exchange Limited (SGX) signed an agreement to develop a new data distribution system Asia stocks. The system will be capable of transmitting packet data from multiple sources and will enable brokers to provide its clients with more complete information. This cooperation will support the efforts of the Singapore exchange update the IT infrastructure and trading and clearing for the purpose of increasing overall efficiency and improve the quality of services provided to market participants in the Singapore capital market.

August 2, 2006, OMX and the Italian stock exchange signed a cooperation agreement for a period of 5 years, the purpose of which is to provide it solutions for the Italian derivatives market IDEM. OMX will provide the Central system infrastructure, surveillance systems, and network services.

Expansion into the neighboring markets of Central and Eastern Europe by creating a new trading platforms started by the German stock exchange and the Vienna stock exchange, which in 2000 jointly established in Vienna, "a stock exchange for a new Europe" (New Europe Exchange, NewEx).

However, only one regional expansion in the context of globalization, the activities of stock exchanges be limited to not could. There is a need in the formation of the infrastructure, which unites the leading stock markets and, in turn, serving as a catalyst for globalization processes. Until recently the major steps in this direction were observed, the penetration of Intercontinental exchanges had single character and newly created sites could not compete with national and regional exchanges. However, in 2006 the situation changed dramatically.

The process of global expansion via the takeover of the us stock exchange NASDAQ, which seeks to acquire the London stock exchange. As a result of the number of transactions in 2006, she has managed to get a stake in the British exchange in the amount of 28.75%. In addition, recent widespread new allegations that NASDAQ is seeking to buy the Nordic OMX holding. Prior to this, NASDAQ has taken the path of creating their own trading platforms to other continents, creating through the acquisition of a controlling stake in European exchange EASDAQ exchange NASDAQ Europe, in Germany - Deutschland NASDAQ, and Japan established the NASDAQ Japan. But all these projects were closed in 2002-2003

Buy London stock exchange NASDAQ would change the entire configuration among leading stock exchanges and would be an important precedent for large cross-border acquisitions. So she responded the main competitor NASDAQ - NYSE Group, which agreed to merge with pan-European exchange Euronext. As a result there was created a new company, NYSE Euronext, the shares of which are listed on stock exchanges. As of the end of March 2007, the capitalization of the new company is about 22.3 billion euros. The unification of the American and European stock exchanges also opened up new opportunities to overcome constraints posed by national legislation (e.g. Sarbanes-Oxley in the USA, accepted in 2002). In addition, NYSE Euronext aims to further gloablly expansion in the form of attracting companies from leading emerging markets - China, India, Russia.

NYSE Group is also considering the possibility of partial absorption of National Stock Exchange of India Limited (NSE), based in Bombay. NSE shares will be acquired for $ 115 million. NYSE Group plans to acquire five per cent of the package - the maximum amount allowed by the Indian laws for sale to foreign investors.

It should be mentioned that quite a large Intercontinental mergers and acquisitions occurred before the increased activity of the NASDAQ and NYSE Group on this direction. So, in 2001, the American Internet system on commodity products Intercontinental Exchange (ICE) acquired the International petroleum exchange (IPE) based in London, now ICE Futures, which is Europe's largest platform for trading futures contracts in the sphere of energy trade.

In North America nicotineamide alliances submitted by the merging of urgent Mexican stock exchange (Mexican Derivatives Exchange - MexDer) and the Spanish exchange trade derivatives MEFF, based on the signed agreement on joint activity between these exchanges. The purpose of the agreement is to join efforts of the two exchanges on the development of the options market in Mexico. In accordance with the terms of the agreement, MEFF, in particular, gave MexDer your trading system and entered into a shareholder of MexDer, with a share of 7.5%.

The German stock exchange (Deutsche Boerse) initially followed a different path of expansion - the creation of an electronic trading platform, integrating various exchanges. Now on this platform (Xetra) 18 trade European stocks. The German holding company of the exchange includes, in addition to trading platforms, clearing houses and media companies, the stock exchange in derivatives trading Eurex, created in conjunction with the Swiss stock exchange and headquartered in Zurich.

German exchange proved to be less fortunate in terms of mergers and acquisitions - so, Euronext has rejected its offer in favor of NYSE Group. Thereby the Union held the largest stock markets of continental Europe, which could become one of the most significant events in European financial integration. Financial globalization has shown its superiority over regional financial integration and, it is likely that the acquisition of American exchange in Europe is not limited.

In addition to mergers and acquisitions, NYSE Group uses and other forms of expansion beyond the American market. So, at the end of January it had entered into a strategic Alliance with the Tokyo stock exchange. The main directions of which will be cooperation within the Alliance is the joint development of technologies and electronic trading systems, the simultaneous placement of securities and the establishment of joint products in the field of market information. In addition, it is planned to harmonize the rules of trading on two exchanges and already identified the first specific direction of cooperation - development of joint exchange traded funds.

Form alliances is a fairly common form of interaction between the exchanges at global and regional scales. Apart from the already mentioned Nordic Alliance Norex, in 1998, the exchanges for trading derivative financial instruments (derivatives) CME, MATIF, SIMEX was established GLOBEX Alliance for the implementation of the Intercontinental trade, the main instruments exchanges into a single trading system. The Alliance allows continuous trading in derivatives. Currently, the Alliance includes: CME, Euronext NV, a unit of trading of derivatives, Singapore exchange (Singapore Exchange - Derivatives Trading), the stock exchange Spanish financial futures and options (MEFF), the Montreal exchange (Bourse de Montreal)and BM&F.

Furthermore, despite the largely established system of national securities exchanges, seven leading investment banks in Europe and the USA took the initiative of creating a new pan-European stock exchange. In the Alliance entered - Swiss Credit Suisse and UBS, German Deutsche Bank and American Citigroup, Goldman Sachs, Merrill Lynch and Morgan Stanley. The reason for the creation of the new exchange was dissatisfaction with the investment banks high commissions of the European exchanges, which, in their opinion, 80% higher than on the U.S. exchanges. On the new exchange, in addition to reducing fees, it is also planned to facilitate trading of large blocks of stock. It is expected that the new marketplace will open in London in early 2008, and in subsequent years, this exchange can become a serious competitor to the NYSE Euronext and the London stock exchange. Western analysts note that the emergence of a powerful competitor will force European exchanges to significantly reduce the cost of their services for clients. Investment banks, the organizers of this Union, are involved in about half of trading in Europe and the threat that they will be deprived of liquidity of the existing market players and will translate many of the companies on its platform, very high. However, the possibility of serious competition with the giants, in our view, is highly questionable, since it requires significant initial investment in terms of economies of scale. This attachment cannot recoup plan benefits by reducing the fee.

As we have seen, in practice it is quite difficult to distinguish between different forms of expansion of the world's leading stock exchanges, and usually they use those forms that are available to achieve these goals, based on existing financial constraints. The beginning of a hostile takeover by NASDAQ, the London stock exchange and subsequent beginning of the merger of NYSE Group and Euronext has opened a new stage of interaction stock exchanges. Major Intercontinental mergers and acquisitions are creating a new architecture of the global financial market, and in these circumstances, an increasing number of stock exchanges can be a destination for regional or global expansion one way or another exchange.

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