Wednesday, March 15, 2006

Exchange fever

Why buy a stock when you can buy the whole exchange? Well, now you can. With an increasing number of stock and commodity exchanges going public in recent years, a craze for shares in financial exchanges has developed, giving investors a chance to own shares in companies that were once member-owned firms.

Lately a wave of consolidation has swept over the financial exchanges, with the big news this week being the proposed merger of Nasdaq and the London Stock Exchange (LSE) and the possibility of the NYSE playing a role in the unfolding drama. Deutsche Boerse is mulling over a merger with Euronext, while both firms have in turn expressed interest in the LSE. Meanwhile, New York Mercantile Exchange (NYMEX) shareholders have approved a private equity group's $170 million dollars bid for a 10% stake in their firm. What's more, even though the deal values all of NYMEX at $1.7 billion, the value of the exchange could be quoted higher as it nears a public offering, according to a Financial Times report.

While enthusiasm for the various merger deals is evident, some are questioning the benefits of consolidation. The Lex column of Wednesday's Financial Times voiced a doubtful opinion on the merits of such globalized exchange mergers, and the reports that LSE brokers want a guarantee that the SEC will not interfere with LSE listed firms. Angela Knight, CEO of the broker group Apcims, believes that a guarantee is necessary to protect UK firms against creeping regulation from abroad.

Culture clash and regulatory burdens could have a stifling effect on the public markets. Listing options for companies could narrow if Sarbanes-Oxley style legislation spreads to overseas marketplaces. Were Nasdaq to gain control of the LSE, they would get access to its Alternative Investment Market (AIM), an exchange that has become increasingly attractive to smaller firms unable to bear the regulatory burdens and costs associated with a US listing. The AIM has become something of a destination point for smaller resource companies and emerging companies from across the globe; observers hope that an acquirer would realize the value of its unique attractions and work to keep them in place.

The effect that such onerous legislation may have on smaller public companies is not the exclusive concern of overseas market professionals. Eliot Spitzer has now joined the chorus of critics that say Sarbanes-Oxley has overstepped its bounds and creates "an unbelievable burden for small companies." Amazingly, this same criticism has been leveled by Representative Michael Oxley, co-author of the legislation. Oxley has even urged the SEC to roll back some of the burdens facing smaller companies.

It just goes to show that the pendulum swings both ways. The same might be said in reference to the markets. To avoid disruptive oscillations in their business, the exchanges might temper their ambitions and proceed with calm judgement and austerity.