Has the global exchange industry lost its marbles again?

DAME CLARA FURSE, a former boss of the London Stock Exchange (LSE), used to say that having her Christmas ruined was an occupational hazard. The British bourse, firmly in the second rank of its industry by size, was subject to three festive-season hostile-takeover bids on the trot between 2004 and 2006, all of which failed. Not every deal fizzled: in that same period much of the global exchange industry, like many liberated former monopolies, went on a consolidation bender.

Everyone talked breathlessly about the critical importance of “24/7 global pools of liquidity”, which didn’t really mean anything but proved to be an excellent chat-up line. The New York Stock Exchange wooed Euronext, a big Paris-based operator; NASDAQ bought OMX, a Scandinavian firm; Chicago’s two big exchanges merged; and in 2007 the LSE itself did a deal, buying Borsa Italiana. The result for shareholders, predictably, was lousy (see chart). Bloomberg’s index of global exchanges remains 42% below its 2007 high (global equities are about a fifth below their peak). The sales and profits of the big exchanges in rich countries have stagnated since, too.

Until late last year the dealmaking had been safely consigned to the annals of shareholder-value destruction. Then, in October, the Singapore Exchange bid for the Australian Securities Exchange (a deal which has yet to close). That was a omen. On February 9th the LSE said it was buying TMX Group, owner of the Toronto stock exchange among other things; and in an echo of the frenzy of yesteryear, later that day Deutsche Börse said it was in talks to buy NYSE-Euronext in a deal that would create the sector’s largest firm by market value, worth about $26 billion.

The goodwill from the last round of deals may have been partly written down but the industry’s tendency to confuse anodyne descriptions of globalisation with statements of industrial logic remains unimpaired. The Singapore-Australia tie-up was proclaimed under the slogan “Asia Pacific—the heart of global growth”. Xavier Rolet, Dame Clara’s successor at the LSE, partly couched the deal with TMX in terms of trade ties between Canada and Europe.

The reality is that the exchange business is unusually unglobal. Securities and derivatives are traded, by and large, in long-standing silos, with their own regulations, laws, working hours and critical mass of big, savvy market participants, who may not all be based in the same country but who share the same rules of engagement. Even if practical, the utility of being able to trade everything, everywhere, all the time is not clear.

One justification for the recent spate of deals is that exchanges, which tend to have different suites of products, can cross-sell across an expanded customer base—TMX could offer its derivatives products to the LSE’s clients, for instance. But there is no good example of this working yet. Another hope is that sales are boosted by the prestige a deal creates. In combination London and Toronto would count for a big chunk of the world’s listings of natural-resources firms—perhaps together they would attract even more new listings. It all sounds a bit feeble, though.

What consolidation definitely does involve is bolting together natural product monopolies. Deutsche Börse is big in trading long-term bund derivatives, for example, while NYSE-Euronext is strong in shorter-term interest-rate contracts. Often these long-standing monopolies are under severe pressure from new, low-cost entrants—which is why sales have been falling in bread-and-butter businesses like cash equities. Joining forces does not in itself realise revenue gains or alter this decline. But it may make it possible to combine the technology and back-office platforms being used by different exchanges, cutting costs. Efficiency savings are the one element of the last round of consolidation that did arrive as promised.

Cost savings are being emphasised again now. The Deutsche Börse and NYSE-Euronext combination should yield annual savings of €300m ($412m), the two firms say, equivalent to about a fifth of the combined entity’s pre-tax profits, while the LSE-TMX deal should produce savings of about 7%. That is respectable, but not big enough to drive an industry renaissance or to justify another round of bidding wars.

What might is a sense that the regulatory, legal and behavioural boundaries that keep financial activity in silos are breaking down. It has happened before: in most countries shares used to be traded on provincial stock exchanges. If anything, however, the transactions this week show just how far away a global capital market is. Both deals have been presented as mergers of equals with laborious governance arrangements to boot. To work, it seems, international tie-ups must still show that national identities will be preserved.