FRANKFURT: The German stock exchange operator Deutsche Boerse is to release 2010 results this week as it holds tie-up talks with NYSE Euronext in a bid to build the world's biggest exchange by revenues and profit.
The talks were unveiled last week just after the London Stock Exchange (LSE) and TMX Group, which covers Toronto and Montreal, announced their merger in one of several global deals that are rewriting the book on financial markets.
Revised regulations, challengers like the US-based trading platforms BATS and Chi-X, which are also in talks, and a planned merger of markets in Singapore and Sydney underscore the pace of change in what was once a rather staid profession.
"The battle of the exchanges has intensified further," commented Simon Denham at Capital Spreads, a financial betting firm in London.
Deutsche Boerse's supervisory board will meet Tuesday, a day before the annual results are published, and negotiations with NYSE Euronext are on the agenda, a financial source in Frankfurt told AFP.
"Such a deal will create the largest exchange in the world and will start to put pressure on the smaller exchanges to fall into line," Denham said.
Plans call for an all-stock merger that would leave Deutsche Boerse with about 60 percent of a group registered in the Netherlands but with headquarters in Frankfurt and New York.
NYSE Euronext operates stock markets in Amsterdam, Brussels, New York, Paris and Lisbon.
The two sides are targeting synergies, or savings, of around 300 million euros $405 million from a tie up, which UniCredit equity analyst Bernd Mueller-Gerberding said "strikes us as being rather optimistic."
He added however that "even a much smaller synergy potential could be attractive - provided there is no offset from major regulatory burdens."
UBS analyst Arnaud Giblat noted that "historically, regulatory and political approvals have generally been benign given that local regulators retain all controls."
Authorities in Brussels, France and Germany have vowed to look closely at the details of a merger to protect local interests but French Finance Minister Christine Lagarde has said a transatlantic pole of market operators would be "a very interesting prospect."
From their origins in clubby 18th century London coffee houses, stock exchange activities exploded following deregulation there in 1986 and the LSE is "unrecognisable from the institution that existed 10 years ago, let alone 25," author Philip Augar write in a Financial Times op-ed piece.
Now, "you have consolidation among the traditional exchanges and at the same time you have had, thanks to regulatory issues, growth in alternative carriers and hence more competitive pressure from that area," Mueller-Gerberding told AFP.
Banks and hedge funds are creating their own trading platforms to reduce costs, and bigger profits are to be had in trading of future contracts and other derivatives, relegating business models focused on equity trading to the past.
The Frankfurt market operator might also be set to shake off some dust, according to Silvia Quandt analyst Christian Muschick.
"We believe that a change in management, introducing a less defensive and more customer and innovation focused mindset would be positive for Deutsche Boerse," he said.
NYSE Euronext chief executive Duncan Niederauer has been chosen to run the new entity.
It would combine complementary activities on two continents, reduce client costs, create a more liquid pan-European market and simplify transaction settlements through Deutsche Boerse's Clearstream unit.
As for going truly global however, an extension to Asia in the near future does not appear to be in the cards.
"There are little revenue synergies to be achieved from a combination of Europe and Asia," UniCredit's Mueller-Gerberding said.
Already, savings of the kind expected from the mooted Europe-US alliance "typically take years, and often cannot be delivered on schedule," he noted.
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