Deutsche Boerse-NYSE deal signals M&A wave

The biggest day ever for mergers of securities exchanges triggered rallies in shares of operators from New York to Sydney and Sao Paulo as derivatives overtake stock trading as the drivers of growth.

Nasdaq OMX Group, IntercontinentalExchange, CBOE Holdings and BM&FBovespa —all of which run derivatives platforms for futures or options —rallied as much as 6.7 per cent yesterday. The gains followed Deutsche Boerse’s announcement that it’s in talks to buy NYSE, valued at almost $10 billion, and London Stock Exchange’s $3.1 billion bid for TMX Group.

While the combinations will create markets that control trading in companies worth more than $20 trillion, or about 36 per cent of the world’s stock-market value, what may prove more lucrative is ownership of growing venues for trading options, futures and derivatives whose profit margins are 57 per cent more than equities at NYSE Euronext.

“We haven’t seen the endgame,” said James Angel, a professor at Georgetown University in Washington. “The margins in futures are juicier than in equities because of the clearing,” he said. “The profitability of equities is squeezed because it’s kind of a dogfight with competitors.”

Shares rally
The merger of NYSE Euronext, owner of the New York Stock Exchange, NYSE Liffe and NYSE Arca Options, and Deutsche Boerse, which runs Europe’s largest securities exchange, would create a company that controls 11 derivatives markets, according to the Futures Industry Association. Deutsche Boerse of Frankfurt also has a stake in Eurex, which owns the International Securities Exchange. NYSE shares surged 14 per cent yesterday, the most since December 2008, and Deutsche Boerse rallied 3.1 per cent at 10.03 am in Frankfurt today.

The new organisation’s market share of futures trading would top the proportion at CME Group, the product of the $9.6 billion merger of the Chicago Mercantile Exchange and the Chicago Board of Trade that rose 0.5 per cent yesterday. The merger would combine three of the nine US options exchanges to surpass the Chicago Board Options Exchange as the nation’s largest market for the derivatives.

In Asia, Hong Kong Exchanges & Clearing said it’s open to mergers, and its shares fell 1.7 per cent yesterday and 4.9 per cent today for the biggest two-day drop since May 2009.