Now Competing on a Global Scale, NYSE, Euronext to Vote on Merger

Shareholders of the New York Stock Exchange and Euronext, one of Europe's largest financial markets, are to vote today and tomorrow on a $14 billion merger proposal to create the first transatlantic stock exchange.

Not to be outdone, NYSE Group's biggest rival, the Nasdaq Stock Market, last week launched a $5 billion unsolicited bid for the London Stock Exchange, saying the combined entity would be the most active global equity exchange, with an average daily trading volume of 7.4 billion shares. That followed October's announcement by the Chicago Mercantile Exchange that it would buy the Chicago Board of Trade in an $8 billion deal to create the world's largest marketplace for derivatives.

The dealmaking has been triggered by a desire of stock markets to boost revenue by making themselves more attractive to major investors, as well as to corporations that want to sell shares to a wider group of investors. The world's biggest stock exchanges have transformed themselves during the past several years, converting from club-like groups serving a handful of seat holders into publicly traded companies responsive to their own shareholders' needs. Driven by a profit motive, these exchanges are now jostling to gain a competitive edge.

"Once these exchanges started running as for-profit corporations, they became leaner and meaner and more aggressive as competitors," said Joel Hasbrouck, professor of finance at New York University. "And I think the mergers can be viewed as attempts by the exchanges to expand into markets for competitive reasons."

U.S.-based exchanges have been losing market share in new listings to foreign exchanges. This year, the London and Hong Kong stock exchanges are on track to trump the Big Board and the Nasdaq in the amount of money raised through initial public offerings of listed companies, Thomson Financial said.

For years, major investors and stock exchanges have talked about a truly global financial market that one day would permit round-the-clock trading of securities from every major country. That vision of a market freed from the restrictions of national boundaries has not yet materialized, but the proposed NYSE-Euronext merger would connect the Big Board with Euronext exchanges in Amsterdam, Brussels, Lisbon and Paris, as well as a derivatives market in London.

While the NYSE-Euronext agreement is in the final stages of completion, the merger between Nasdaq and the London Stock Exchange is far from a done deal. London Exchange shareholders, who were told by the British exchange's board to ignore the offer, have until Jan. 11 to accept the bid, the first in a series of steps Nasdaq would need to make to gain control. Shares of NYSE Group closed yesterday at $101.47, up $3.42. Shares of Nasdaq closed at $35.99, up 44 cents.

Consolidating financial markets into more tightly connected international platforms offers the promise of reduced trading costs for exchanges, though analysts and economists question whether those savings would trickle down to smaller investors. NYSE and Paris-based Euronext say their merger would have cost savings of $375 million, about $250 million of which would come from integrating technologies, such as moving three trading systems into one platform. NYSE Euronext, as the combined entity would be called, would also "create opportunities to expand the combined revenue base" by an estimated $100 million over three years, the companies said.

For now, small investors will probably not see a significant drop in trading costs, analysts said. Those costs have already fallen so dramatically that there would be little room to improve, said Charles Jones, professor of finance and economics at Columbia University. Transaction fees charged by the exchanges per share are already fractions of a penny. Other trading costs, such as the spread, which is the difference between the asking price and bidding price on a stock, only make up a small portion of the commissions brokerage firms charge small investors, analysts said.

"We're almost down to the minimum on those already, I can't see a big effect on trading costs for most investors," said Jones, who has studied the trend of trading costs over the past century. For example, Jones said, investors pay about $15 in commission and spread costs to trade 1,000 shares of General Electric stock, compared with about $130 in 1990 and $230 in 1980.

And some question whether the mergers would bring the savings touted by the exchanges. "I'm not sure that there are any operational savings in merging two markets as large as the NYSE and Euronext," Hasbrouck said. "We are not dealing here with small businesses that pool their resources in order to eliminate their inefficiencies. These organizations are already large enough that they're using technology in the optimal way."

The NYSE-Euronext proposal earlier this month won the support of a panel of regulators in Europe, and yesterday, the Dutch government, which holds a veto over the NYSE-Euronext merger, gave the deal a cautious blessing. Those approvals are important because many in Europe have expressed concern that strict U.S. corporate governance rules imposed by the 2002 Sarbanes-Oxley Act might be applied to Euronext-listed companies. Under the terms of the proposed merger, U.S. regulators would have no policing power in the European markets, and European regulators would have no say in the U.S. markets. This division of authority went a long way to appease fears that stricter U.S. regulations might be imposed abroad.

The issue of regulation could keep a combined NYSE-Euronext from becoming a truly integrated market, as some analysts say the merger partners would like to see happen. Borderless exchanges raise questions about whether financial regulators in one country might lose some of their authority to oversee companies listed in their home markets. Would British companies be willing to report earnings on a quarterly basis, instead of twice a year, as they do now? Would the Securities and Exchange Commission relax some rules on companies registered in France if they want to list on the NYSE? How about on equities registered in the Netherlands if Americans want to buy them here? What does that say about investor protection?

"I think everybody is inclined to believe the markets are going the way of globalization and those are issues that the merger partners are going to have to confront," said Kurt N. Schacht, managing director of the Centre for Financial Market Integrity at the CFA Institute, a nonprofit group in Charlottesville. "I'm actually optimistic that consolidation leads to better investor protection."

Staff researcher Richard Drezen contributed to this report.