Fair Exchange Is No Robbery

The City of London – as well as Frankfurt, Chicago and Hong Kong – is getting its knickers in knots over what’s going to happen to the London Stock Exchange Group (LSEG), shares in which have popped up to almost £30 each on a possible takeover battle.

In the last week of February the German equivalent, Deutsche Börse, and the LSEG outlined what they called an all-share “merger of equals”. In the words of the Financial Times: “A deal would consummate a 15-year on-off courtship between the two exchanges and create one of the world’s leading providers of trading platforms, risk management and financial data. With a combined market capitalisation of more than £20 billion, the new group would become Europe’s main answer to Chicago’s CME Group, Atlanta’s Intercontinental Exchange and Hong Kong’s HKEx.”

The history of European grands projects such as the proposed link between the LSEG and Deutsche Börse is decidedly mixed.

Who, for example, today remembers Quaero, grandly announced by the then French President Jacques Chirac in 2006 as the pan-European challenger to the multimedia search engines Google and Yahoo. Great idea, poor execution. French and German engineers squabbled over designs and Quaero quietly died in 2013. On the other hand Airbus, a European consortium, has done reasonably well in challenging the dominance of the US aircraft manufacturer Boeing. Would the LSEG+Deutsche Börse link-up be more like Airbus or Quaero?

Unsurprisingly, now that the LSEG appears to be in play, the US’s Intercontinental Exchange (or ICE as it’s more commonly known as) has said it’s contemplating an outright bid for the London exchange. Under rules guiding UK takeovers, Deutsche Börse has until 22 March to table a firm offer for the LSE or walk away and ICE has until 29 March. It’s possible that other giant exchanges will throw their hats into the ring.

Any or all of these plans may of course crumble to dust – and the upcoming referendum in the UK over Britain’s membership of the EU is going to make sorting out the LSEG’s market value extremely complex, never mind what it might mean for the City of London’ future as a centre of global finance. And, moreover, this is before any consideration of how politicians or financial regulators might view any merger or takeover.

Sitting on the sidelines, I can’t help feeling that this tussle of giants is a bit like ‘never mind the quality, feel the width’. Let’s look at it from first principles. What’s an exchange for? According to Nandini Sukumar, CEO of the World Federation of Exchanges, an exchange is a place “where investors can come together to trade stocks, derivatives and commodities and other securities…Exchanges sit at the heart of the financial system. They provide the link between the real economy and markets in multiple ways.” Any merger/takeover of the LSEG will be all about bringing down the costs of trading to the banks and brokers. It probably won’t make a blessed bit of difference to the man or woman on the street.

Except – the fewer exchanges there are, the greater the consolidation of systemic risk failure, and the bigger the temptation to view any exchange breakdown as invoking a ‘too big to fail’ intervention by policymakers and central banks. We’ve been there before.

But perhaps the greatest criticism of the discussion about the LSEG’s future is that it’s happening in a self-referential vacuum, without any apparent wider consideration of what it is our societies need from exchanges for current and future sustainable economic growth. Big is not necessarily better; it’s just big. If the LSEG and Deutsche Börse join forces, and if the UK were to vote to leave the EU, that might conceivably have a negative impact on London’s prestige and power as a financial centre, and perhaps on the UK economy as a whole – but no-one can, right now, have a clue about that. What’s faintly depressing about this story is the absence of any wider consideration about grass-roots change – putting capital more at the service of people, rather than simply imposing it on them. If exchanges are at the heart of the financial system, then surely they ought to be required to be thinking with the heart, and not just the head?

 

 

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