Will stock exchange consolidation just aggregate obsolescence or provide new features and access to the equity market?
Related articles: Regional stock exchanges are deprecated! Companies need to adjust to new features of a global equity market
In a complex series of deals, a global stock exchange is beginning to emerge. This stock exchange has a meaningful United States, European and Middle East presence. Will this global stock exchange simply aggregate obsolete business models and reinforce the status quo? Will it offer new features to the global community and improve access to more market participants. I have extracted some key points from an article below for your review and will then offer some comments and observations.
Extract:
- “It emerged on Wednesday that Borse Dubai has acquired a 28% stake in the London Stock Exchange after agreeing to a complex series of transactions with US technology exchange Nasdaq, creating a global financial marketplace with a footprint spanning the US, Europe, the Middle East and strategic emerging markets.
- “On the closing of the transactions with Borse Dubai, and completion of the proposed combination with OMX AB, we will have the technological infrastructure and the financial strength to serve our customers and to achieve our global ambitions,” Greifeld added.
- Greifeld continued: “The combination will create the largest global network of exchanges and exchange customers linked by technology. Since our original announcement of the combination with OMX, we have become even more excited about the prospects for the combined company. The combination provides significant benefits for customers, shareholders and other stakeholders in both companies. We are pleased that our agreement with Borse Dubai allows this deal to be completed in the best fashion for our shareholders, for OMX shareholders and our collective customers around the world.â€Â
- Regarding Borse Dubai becoming a shareholder in Nasdaq, Greifeld announced that: “We are pleased that Borse Dubai has decided to become a shareholder in Nasdaq. This better positions New York, as well as the US, to successfully compete with other global financial markets and provides greater certainty around our growth plans, while reinforcing the unique status and strength of Nasdaq’s technology and trading platforms.â€Â
- Commenting on the announcements, Essa Kazim, Chairman of Borse Dubai, concluded: “Our primary objective is to build a world class, growth oriented exchange out of Dubai and to become the center for capital markets activities in the emerging markets. By entering into this partnership with Nasdaq, we will benefit from Nasdaq’s world leading brand, technology and platform. In addition, this combination will establish a gateway to large pools of liquidity.â€Â
Comments/observations:
- The deals provides further finance for the US trade deficit. It is an example of the United States “selling cows” (assets) to buy milk (consumer spending). Dubai invests into Nasdaq for a 20% interest and also purchases Nasdaq’s 28% interest in the London Stock Exchange.
- Dubai exchanges some of its USD dollar assets for a minority interest in a global stock exchange. It also reduces Dubai’s exposure to a declining USD by purchasing the interest in the London stock exchange.
- Dubai is spending US$400bn to create a world class financial centre. This buys it a significant minority interest in a global business. Dubai owns 20% of this business. Unfortunately, it remains a financial investor, and may not have the strategic influence. Dubai can only vote 5% of its shareholding which effectively preserves US control. This voting restriction anticipates political reaction to selling a large interest in a leading US exchange. There has been significant US political reaction to the sale of certain US assets in the past.
- At its simplest, the business of stock exchanges is the matching of buyers and sellers of quantities of shares. At its more complex are important functions of settlement and custody. The industry could, however, run on a single computer anywhere in the world and offers a very narrow niche of functionality for the equity market (see Regional stock exchanges are deprecated! Companies need to adjust to new features of a global equity market ). Most of the stock exchange infrastructure in the world is obsolete. It could also be suggested that much of the software that runs enterprises is also obsolete. If the software is not obsolete, it could be replaced or rebuilt at a fraction of the cost. Stock exchange consolidation may just combine redundant technology, declining customers bases and a redundant business model. This legacy may prevent new initiatives to provide greater access to the equity market for smaller companies. We may have a larger organisation with the same redundant business model with limited access to a niche of potential market participants. Will this new organisation provide greater access to capital markets for all market participants?
