The marriage-go-round in trading venues goes around again

After a few years of worrying more about the health of the companies that trade on the world's stock exchanges, suddenly the exchange companies are worried about their own businesses again. In a sudden flurry, the London Stock Exchange announced a merger with the Toronto Stock Exchange, and then NYSE-Euronext said it was discussing a merger with Deutsche Börse, the company that owns the Frankfurt bourse and the Eurex derivatives market. That would put the Chicago derivatives company CME in an awkward position with both Liffe and Eurex in the same hands. The question on everyone's lips, though, isn't so much why is this all happening, but rather: why do these companies exist?

Exchanges grew up in a different economy, when traders met in person to come to trust one another (well enough, at least) to conduct business. The exchange was the venue for the meeting, and the landlord laid down rules of conduct. Now, regulators take on the rule-making, and networks and computers provide the meeting place. Who needs an exchange? Changes in regulation killed what little was left of the natural monopoly of bygone days, and those networks and computers provided the means by which investors could aggregate the information needed to see even the liquidity collected in dark pools.

Exchanges still hold some remnants of national identity: Witness the official French discomfort when the Germans seems to be gaining pride of place with Frankfurt, not Paris, as the European headquarters of the company that could be fetchingly called DBNYSE. The surprise here is that by market capitalisation, Deutsche Börse's shareholders would get 60 per cent of the shares in the merged company. How the Americans have been humbled! But these companies and the services they provide are less and less to do with national competitiveness and more and more to do with the speed and cost of executing block trades on behalf of hedge funds and other high-frequency traders in shares of companies based somewhere else in the world.

In London and Toronto, the merger is less political and more obviously commercial. But London's value as a trading venue has seen perhaps the biggest transformation. Its trading volumes have been affected by off-exchange platforms and order internalisation more than most. And its listing portfolio, especially of large companies, looks less and less like the country in which it happens to reside. This story is back, and it isn't over.

Source documents: The NYSE-Euronext news release tells its side of the story. The LSE statement explains its rationale for the deal.