NYSE and Deutsche Börse: Bigger does not always mean better

March 9, 2011: 5:00 AM ET

The proposed merger of the NYSE and the Deutsche Börse is just the latest in a wave of similar deals, even as smaller competitors continue to grab business.

By Chris Redman, contributor

NYSE Euronext' s Duncan Niederauer (right), Michael Geltzeiler (center), and Jan-Michiel Hessels, announcing the Deutsche Börse deal

If Deutsche Börse manages to complete its acquisition of NYSE Euronext -- and that's a big if because of antitrust concerns and fears that the U.S. will chafe at losing control of the fabled New York Stock Exchange -- the all-share deal will create an Überbörse worth around $26 billion, making it the world's largest exchange (measured by market cap). But does bigger mean better?

For those who invest in shares of such bulked-up trading institutions, the answer appears to be no. Despite a broad market recovery, Bloomberg's index of global exchanges remains 42% below its 2007 peak.

That has done nothing to slow the wave of exchange mergers -- some 600 over the past decade. Just hours before the NYSE (NYX) announcement, the London Stock Exchange (LSE) said it would combine with Canada's TMX to create the world's largest bourse in terms of company listings. This followed a bid late last year by Singapore's exchange to pay $8.3 billion for Australia's ASX to create Asia's fourth-largest stock market.

What the deals share are ambitious claims -- and a certain desperation. LSE chief executive Xavier Rolet boasted that the tie-up with TMX would create a "true leader in the global exchange business." Not to be outdone, NYSE boss Duncan Niederauer vowed to create the "premier global exchange group."

Those aren't the first such proclamations. Back in 2007, when the NYSE bought Euronext, a collection of European bourses, NYSE predicted that the deal would "globally redefine the marketplace for trading cash and derivatives securities, producing significant benefits for shareholders, issuers, and users." Four years later the NYSE and Euronext haven't even integrated their trading platforms.

Thanks to deregulation, the business of trading shares and other instruments has become highly fragmented. Once quasi-monopolies, the traditional exchanges have been undermined by myriad competitors, from so-called dark pools to upstart multilateral trading facilities, or MTFs, whose electronic platforms are increasingly favored by high-speed traders. "We've got better technology and lower fees because we can operate at a fraction of the costs of the incumbents," says Alasdair Haynes, chief executive of Chi-X, Europe's fastest-growing MTF. Launched in 2005, Chi-X has already grabbed almost 18% of Europe's equities market. The NYSE once controlled 80% of the trade in stocks listed on its markets; that figure is now down to about 23%.

The traditional bourses believe mergers will help them survive by saving money (and fattening margins). Deutsche Börse is promising some $412 million annually in cost savings. But the MTFs will be difficult to beat. "The combined exchanges will still have thousands of employees," notes Haynes. "We have about 50." Besides, most MTFs are owned by the banks that are their main clients. It's in their interest to drive business through the alternative platforms, meaning life is likely to get harder for the traditional exchanges.

Also on Fortune.com:

Why the NYSE deal is bad news

For mergers, it's a small world after all

The big deal about the NYSE's big deal: Derivatives

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