Published On: Sun, Jul 24th, 2011

Atlantis Exchange in Merger Talks With Bursa El Dorado

Asia Exchange Mergers…to create pan-global exchange in fish futures and deep sea mining stocks.

Yes of course it’s ridiculous but so is all the merger mania talk swirling in the media these days. The latest was the HKEx buying the London Stock Exchange (LSE) and before that the Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE) merging. Seems the media will spin almost anything to get eyeballs in front of a website.

Let’s look at the TSE and OSE alleged merger talks. First of all, where is the synergy? The TSE just spent a small fortune implementing Arrowhead, an in-house developed matching engine, and its new derivatives platform, TDEX+, is built on NYSE Technology. Now the OSE is a pure NASDAQ OMX shop having just launched JGate. So do we rip out the shiny new matching engines and migrate and consolidate technology so soon? Of course not. The best bet is for the TSE to buy the Tokyo Financial Exchange (TFX) then merge with NYSE/Deutsche Bourse (is that NYbourse or DeutscheSE?). The TSE needs to build its derivative business and its CEO, Atsushi Saito, is on very good terms with the NYSE CEO and, further, the TSE is going to become part of the SFTI infrastructure late this year, NYSE/Euronext’s global trading network.

But there are a few problems. The TSE isn’t a public company and the regulatory soup in Japan could put the kibosh on any merger even a local one. Also, the Proprietary Trading Systems (PTS) in Japan are chipping away at market share in Japanese equities and if the TSE doesn’t act soon enough it could go the way of the LSE.

On the other hand, the OSE needs to build its equities segment and could have a strangle hold on derivatives trading in Japan if it were to buy TOCOM and TGE. TOCOM runs on NASDAQ and houses their matching engine within the OSE’s data center. We’re putting our money on an OSE, TOCOM and SGX merger in the coming months. SGX is another NASDAQ shop and is in desperate need of a suitor or it faces obscurity as China with Hong Kong, India and Japan along with the big western exchange groups muscle them out of the market.

All our speculation aside we don’t expect to see much if any merger mania running wild in Asia. Let me ask you this would you rather pay US8Billion for Australia or US6Billion for both London and Toronto? The fact of the matter is that Asia’s exchanges have valuations based on monopolies and are not in line with competitive businesses. Competition is coming to Asia fast so say good bye to those valuations.

That brings us to the HKEx and LSE “mega merger”. Technically speaking, the HKEx could use its vastly over-priced shares to go around making an acquisition here and there but the reality is the HK bourse is still in the stone age in terms of technology and has had a china centric focus for quite some time now. Our view is that they aren’t even considering a merger and they are focusing on bringing their technology up to par and becoming the global hub for RMB trading.

We really enjoyed this quote from the “breaking news” at The Standard about the LSE and HKEx merger

“Market sources speculated China would support the HKEx in a possible bidding war against the Stock Exchange of Singapore or SGX for a merger with the LSE.”

Such hard hitting journalism. The market capitalization (the exchange’s own share price not the securities listed) of the HKEx is the largest in the world dwarfing the SGX many times over. Why would they even need to have the mainland step in? Who are your sources? Probably someone at the News of the World.

Asia has huge potential and we all know it but as it stands, just to offer some perspective, the entire sum of equity trading in Asia is just a little more than what trades on NYSE/Euronext. The future is China, India and Japan (Indonesia too but way down the road) all the other markets really are just odd lots.

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