In 2011, the Deutsche Boerse Group launched an offer on the New York Stock Exchange. Everybody expected that the U.S. authorities would object to this foreign acquisition of the most iconic Stock Exchange in the United States, and arguably in the world. Not only did it not happen, but very quickly the U.S. Department of Justice, quite naturally, concluded that there was no antitrust issue. Incidentally, NASDAQ made a desperate attempt to purchase the NYSE for $11.8 billion and the merger of the two largest cash equity exchanges of the United States was stiffly rejected by the U.S. authorities. Even Senator Chuck Schumer, otherwise known as the “Wall Street Senator,” was favoring the German deal as the best way to protect New York according to the Wall Street Journal.
The European antitrust authorities are myopic.
From the beginning, however, the risk was that the European antitrust authorities would object to an excessive concentration of the European derivatives markets.
Already in 2007, when Deutsche Boerse launched a non-solicited bid on Euronext, the same authorities objected to the concentration of the derivative markets, paving the way to a takeover by the NYSE. European Commissioner Charlie McCreevy was an Irish strong partisan of laissez faire: he was not prepared to even look at the policy implications of the move by the NYSE, favored by the French establishment. The ECOFIN (the European Ministers of Finance) stated that the matter was to be decided by the shareholders and did not even express any preference for a strong European leadership. Any attempt to even try to interest those European leading institutions was met with a complete lack of interest. I was part of that effort and can testify of this lack of involvement.
Deutsche Boerse launched a bid on the NYSE, combining the purchase of a trophy property, the NYSE, a leading position in the United States and a stronger derivatives presence in the world namely, with the Chicago Mercantile Exchange. Did Deutsche Boerse and the NYSE believe that the 2007 failure would have changed the European Commission approach? Did they expect a strong backing of the European Member States? The antitrust division did not appreciate the long-term implications of the battle for supremacy of the Exchanges around the world. They were not prepared to analyze the competitive landscape beyond the European borders.
Commissioner Joaquin Almunia refused to approve the transaction and stated: “Financial exchanges are the lifeblood of the European economy.” I am convinced that in order to serve the real economy well, financial markets must be open, efficient and competitive. Our important ongoing work in financial regulation fully supports this approach.
The ICE took advantage of the European lack of vision
NYSE-Euronext and Deutsche Boerse were bitter about this refusal, and the next bidder was, as announced to the deaf ears of the Commission, a U.S. suitor that managed to launch an offer at… $8.2 billion. I am sure that NYSE shareholders are eternally grateful for losing $3.5 billion.
The ICE offer is also a confirmation of the importance of the derivative markets. When the NYSE decided to abandon its equity options business, its management built the International Securities Exchange that became the largest equity option exchange in the United States. Deutsche Boerse was smart enough to acquire it in 2007 for $2.7 billion.
Euronext had acquired by the LIFFE derivatives under the nose of a complacent London Stock Exchange, led by Dame Clara Furse: the British Government and Parliament were very critical of the LSE failure. She was accused of being naive in assuming that the deal with Liffe, where she used to work, was in the bag when in fact it was eventually sold to the French-led exchange for a sum less than Mrs. Furse was prepared to pay.
The truth is now appearing plainly. Euronext does not interest ICE, who intends to keep the former LIFFE and float the Euronext cash market. Europe has lost an opportunity of world scale leadership, and Euronext, who was taking refuge on Wall Street, will soon be reduced to what it was 20 years ago!
Will Europe let the cash markets merge?
The question is now whether the European Commission would accept a merger of Euronext, composed of Paris, Brussels, Amsterdam and Lisbon, with another cash market, being OMX (owned by NASDAQ), the London Stock Exchange (owner of the Italian Borsa) or the Frankfurt Stock Exchange. Cash markets are not profitable for one reason: their business of trading large stocks can easily be, and actually is, cannibalized by trading platforms such as Chi-X and BATS. Their costs are lower, they only work on liquid stocks and have no regulatory or listing requirements. Trading less liquid stocks is hugely important for the European economy but is a money-losing business. There is only one solution: scale.
It is now essential that Europe produces a deep, robust, transparent and effective pan-European cash equity market. It could become overnight the leading Eurozone Stock market and compete with other trading venues based on the MIFID directives.
I have no idea whether anybody is willing to even explore the idea with Michel Barnier, the European Commissioner for the Single Market, let alone with his antitrust colleague, Joaquin Almunia, who continues to defend his decision not to let Deutsche Boerse acquire the NYSE.
This would require two cultural revolutions at the European antitrust division: recognition that pragmatism is important in those matters and lawyers are not the best judges of market and business implications of their own decisions. In the meantime, Europe has weakened the position of its Exchanges and remarkably served the more flexible interests of the United States of America.
This article was originally published by the Huffington Post on January 14, 2013.