London exchange pessimistic about merger

The London Stock Exchange (LSE) said that it is "highly unlikely" it will be able to meet antitrust conditions set by Brussels for merger with Deutsche Boerse, the German stock exchange. For the moment the LSE did not put an end to the possibility of a tie-up, however, saying it would continue to seek to implement the merger.

Deutsche Boerse
Deutsche Boerse Wikimedia commons

Audio report

The European Commission has strict anti-trust regulations. And in this case, they have requested London Stock Exchange (LSE) to get rid of their majority stake in the Italian trading unit MTS.

And for now, the LSE has said it could not commit to such a request.

“On the one hand it would strengthen the European stock markets versus the US, which is maybe good from a European perspective,” says Stephanie Griffith-Jones, Financial Markets Program Director at the Initiative for Policy Dialogue at Columbia University. “But on the other hand, it weakens the role of smaller stock markets."

“And I think for the need of competition, it is good to have smaller stock markets and businesses in individual countries rather than have this American style massive concentration of power in a few very large stock markets, which has been the recent trend in the last decade or so.”

The plans for this merger were not of today as they were made before the Brexit vote in the UK. But a possible “hard Brexit” may not be helpful for those who want the merger. “Clearly the fact that the UK has decided not to stay within the EU must have a negative influence on the decision,” says Griffith-Jones.

“But from a EU perspective it is clearly less attractive to allow a greater concentration of power in London, as London will be outside the EU and other EU bodies in the financial world, like Euroclear, will in fact be moving out of London as a result of the Brexit decision. So it makes sense from a EU commission perspective that they would be less interested in so much concentration of stock markets being in London."

Other factors may play against a merger as well. “The stock exchange landscape is very fragmented in Europe,” says Nicolas Veron, a senior fellow with the Brueghel Insitute in Brussels, “because of the symbolic value of stock exchanges with the public because they largely consider that stock exchanges are the symbol of national capitalism.

“Therefore politicians don't like the idea of cross-border mergers in that space, even less than in other industries.

“The truth is that we have a large integrated market for equity trading now in Europe and that actually is the whole key of the business model of Deutsche Boerse and the London Stock Exchange, but that has big symbolic resonance, and that is also one thing that makes this sort of merger more difficult,” he says.

But in the end nothing has been decided yet. “This was actually a very complex deal from the start,” says Veron, “and it was made even more complex by the UK vote to exit the European Union. So the fact that there are big hurdles in itself is not a big surprise, and negotiations are still ongoing." That is not the same as "completely over," he says.

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