NEW YORK Asia is emerging as the next battleground among the four giant exchange groups in their moves toward global conquest of the trading world.
Taiwan Stock Exchange Corp. officials disclosed they are in talks to sell 25% of the Asian market with a heavy roster of coveted technology listings to a major foreign group.
The contenders include the four exchange groups that are in the process of reshaping the map of international trading: NYSE Euronext and Nasdaq Stock Market Inc., both in New York; Deutsche Boerse AG, Frankfurt; and Chicago-based CME Group Inc.
Through acquisitions and technology integration, the four are in a highly competitive race to lay the groundwork for worldwide virtual highways that would give institutional investors direct access to all major financial centers.
Such competition is great for customers, in particular institutional clients who are searching for greater efficiencies and lower cost, William McGowan, managing director at global brokerage firm Interactive Brokers Group LLC in Chicago, said in an interview.
With the world of trading likely to be held by a few major players, efficiencies and synergies will only benefit institutions that are present in markets, not only all over the world, but also across asset classes, Mr. McGowan added. He explained that access to the worlds markets through a handful of gateways would help brokerage firms deliver better execution at lower costs to global investors with large orders.
The only way for exchanges to compete against off-exchange venues that cross large orders is to give their customers easy access to deep liquidity pools, Mr. McGowan added.
Yet, successful market globalization remains a complex three-part equation that requires deep coffers for acquisitions, technology know-how for difficult systems integration and a third parameter they cannot control, streamlined regulations. If any of the three parts is missing, exchange consolidation could remain what it started as a mere collection of isolated exchanges operating independently under the financial umbrella of a holding company.
Regulators from different countries, who have already dealt with cross-border mergers on a case-by-case basis, are looking to expand that cooperation on a global basis.
There will probably never be a global securities regulator, and we probably wouldnt want one, but all of us have got to recognize that there is not just one way to effectively regulate markets, Securities and Exchange Commission Chairman Christopher Cox told the audience of a cross-border securities market mergers conference at the Columbia Law and Business School in New York on Dec. 19.
The combination of new technology and new legal structures has been the springboard, first, for dramatic changes in the U.S. capital markets, and, simultaneously, for the new globalization of markets that so clearly characterizes the new century, Mr. Cox also said, adding that the emergence of cross-border exchange groups brought upon extraordinary levels of cooperation that have developed among the SEC and our counterpart regulators.
Mr. Cox did not elaborate on the details of the next level of cooperation among regulators, but sources close to the process said the efforts center on mutual recognition among foreign regulators, which could lead to allowing foreign brokerage firms approved by one jurisdiction to operate in another.
It is the same philosophy as the passporting among 30 European countries with MiFID, the European Unions Markets in Financial Services Instruments Directive, one industry source said. If a broker is found compliant with all the rules in one MiFID country, the firm can offer the same services to institutional investors in another MiFID country.
Part of the rationale for the formation of trans-Atlantic exchanges is that trading will have fewer frictions globally, and the ability to link liquidity pools will create more attractive trading and listing venues. This depends on regulatory evolution, something that once seemed plausible but unlikely, but now seems to be increasingly apparent, said analyst Edward Ditmire at Fox-Pitt Kelton Cochran Caronia Waller LLC, in New York.
The World Federation of Exchanges, which represents 80 markets in the Americas, Europe and Asia, recently asked the International Organization of Securities Commissions to open up a dialogue leading toward reciprocal recognition among regulators around the world. Such recognition could be better achieved if the SEC, like the other U.S. regulator, the Commodity Futures Trading Commission, abandons its rule-based system for a principles-based one, widely used overseas.
The Big Four
While the regulatory saga unfolds, the four major global exchange groups are aggressively pursuing takeover strategies, all the way to Taiwan, to be best positioned as worldwide leaders.
Their respective Asian strategies differ, as do the various business models that led to the creation of the groups:
•NYSE Euronext officials entered into an agreement last August with the Tokyo Stock Exchange Group Inc. to upgrade the Japanese markets trading systems, the first step in what may lead to a merger down the road. NYSE last year also opened an office in Beijing with some fanfare and signed a Memorandum of Understanding with Vietnams Ho Chi Minh Stock Exchange Ltd.
•Executives at Borse Dubai, Nasdaqs proposed partner under a complex deal to acquire OMX AB, have already stated their aim to pursue acquisitions in Asian emerging markets, which would come under the Nasdaq brand name, as will the new Dubai International Financial Exchange. Nasdaq also has a cooperation agreement with Chinas Shenzhen Stock Exchange.
•Deutsche Boerse, which paid about $900 million for a 5% stake in Indias Bombay Stock Exchange, last year provided its Xetra trading technology to the Shanghai Stock Exchange, while Eurex forged ties with the Osaka Securities Exchange.
•CME Group officials have been the most active in pursuing memoranda of understanding in Asian countries where they obtained the right to distribute their own trading screens and develop new contracts, such as Chinese renminbi currency futures. The Chicago powerhouse has agreements covering a proposed business alliance, with Chinas Dalian Commodity Exchange, Shanghai Futures Exchange and Zhengzhou Commodity Exchange as well as markets in South Korea.
Also acknowledging the emergence of Dubai as the worlds fastest-growing new financial center, the CME sought and received approval from the Dubai Financial Services Authority to directly market access to its derivatives listings in the emirate.
This recognition allows CME Group to offer direct access to our global suite of products and to work more closely with our customers in the Dubai International Financial Centre. This is an integral part of our long-term global strategy, said Rick Redding, CME managing director for products and services.