Exploring reasons behind exchange mergers and analysing their success

Abstract

Stock exchanges are primarily in the business of security listing, trading, and clearing services and providing a mechanism for discovering price information. They also generate revenue for the organizers of the marketi . The business scenario of stock exchanges has undergone tremendous changes over the past few years. Stock exchanges that started as government or member owned national stock exchanges have become for-profit, publically listed exchanges. These exchanges operate at an international level with compatible regulations and joint trading systems. The stock exchanges have also ventured into allied areas. For example areas like derivatives post-trading services, trading and software sales. These sectors have shown strong profit-earning potential and hence have attracted the stock exchanges. More recently, there has been a trend of consolidation in the stock exchange industry all over the world. However, it is still not clear whether exchange merger is necessarily a good thing or not. This gets highlighted from the fact that the stocks of several exchanges that saw mergers in the earlier parts of 2007 have underperformed in the global stock markets. The revenues and margins of several exchanges are also observed to be stagnated. Post consolidation, their large size also makes them more difficult to operate and manage. On the other side, the mergers have shown economies of scale because it cuts down on IT infrastructure, market operation costs and administrative function. A more important reason behind the mergers is the potential economies of scope. Also, the post-merger entity will expand the customer base and provides an opportunity to sell the financial products cross-border. It is also unclear and interesting to see if the Indian stock market will get any important benefits from mergers, if any, given the regulations that are existing right now. In order to understand the underlying reasons behind mergers of exchanges and its impact on the stakeholders, it is important to analyze the structure of the exchanges.