This article describes a history of stock exchanges and provides information about why there is so much mergers and acquisitions (M&A;) activity occurring.
Stock Exchange History
The modern stock exchange has its roots in joint-stock companies that operated in the late 16th century and early 17th century in Europe. In 1602, the Amsterdam-based Dutch East India Company, a joint-stock company, issued the first-ever tradable shares. As trade with North and South Americas, Asia, Russia and other countries expanded, more and more companies like Dutch West India company issued tradable shares. With expansion of the global economy, stock exchanges were established in almost every country, most notably in Wall Street, New York in 1792. Trading was essentially done manually, but since the 1980s, increasing automation led to computer trading become the order of the day.
Mergers and Acquisitions
Of late, globalization and technology have spurred an increase in mergers of stock exchanges. Initially, mergers happened in Europe. For example, in March 2000, the consolidation of Brussels, Amsterdam and Paris exchanges led to Euronext. The current trend is toward transcontinental mergers. For example, Euronext merged with the New York Stock Exchange. Currently, there are proposals to merge the Toronto Stock Exchange with the London Stock Exchange. The New York Stock Exchange merging with Deutsche Bourse of Germany is the latest in news.
What are the factors that are driving the traditional stock exchanges to seek mergers? First, the development of Alternative Trading Systems (ATS), which operate outside the stock exchanges but perform the same function of bringing buyers and sellers together. ATS are able to offer lower transaction costs and gained market share at the cost of traditional stock exchanges. Mergers can enable stock exchanges to lower costs. Accordingly, there are huge technology savings. Once two exchanges are merged, there will be no need for two separate technology platforms. Hence, there will be less technology development, maintenance and manpower costs.
Secondly, the inter-listing of companies will be possible. This will enable the companies to tap capital and increased revenue for the merged stock exchange through higher listing fees. Third, increased liquidity will lower the costs of issuing equity and also trading costs for retail investors. The lower costs will enable the traditional stock exchanges, which have been losing revenue, to compete with Alternative Trading Systems like Omega, Chi-X and so on.
However, stock exchanges are viewed as the citadel of capitalism both in Europe and North America. Merging a country’s stock exchange with another one often raises political opposition. Questions are often raised as to the ability of the country’s financial centre to be the financial capital of the world. Also, regulatory approvals are required, and there could be opposition due to the belief that mergers reduce competition. The merging entities must agree on the location of exchange headquarters and the sharing of control, which includes decisions regarding the number of members each side will have on the board, which entity will get the position of chief executive and so on.
But these factors cannot deter the continuing spree of stock exchange mergers, as the benefits clearly outweigh the risks. As transcontinental mergers become more common, we might even be in for 24-hour trading and for investor opportunities to purchase shares of companies located in other countries. This is consistent with investors taking a global view on investment.
