The frantic game of musical chairs among Europe’s stock exchanges makes more sense if you think of it as a conspiracy by Wall Street to gain control. The two top prizes are in the City. The London Stock Exchange (LSE) ceased to be a national institution long ago, but it is the biggest in Europe and streets ahead in trading non-domestic shares. Thanks to an enduring cultural divide, the LSE has no link to Liffe, the City derivatives exchange, beyond having ceded its moribund options trade. Paris-led Euronext astutely wooed Liffe when it wanted a partner.
Eurex, the German-Swiss derivatives exchange, has more trade than Liffe, but its strength lies mainly in contracts of less interest to Wall Street. So the LSE, Euronext and Deutsche Börse, which were mutuals a few years before, circled each other like jungle-smart predators.
Wall Street was still in the garage. The New York Stock Exchange (NYSE) still had men shouting at each other in a big room 15 years after London’s Big Bang made the LSE floor an empty space. Nasdaq, all-conquering during the dot-com boom, was now binding its wounds with a rights issue.
Europe’s profitable exchanges had cash as well as listed shares. One by one, however, they had their balance sheets sapped. Under pressure from investment banks, the LSE paid out £673 million and took on debt, ensuring that it was in no position to lead consolidation. It was to be a target.
Deutsche Börse pounced, but Werner Seifert, its anglophile chief executive, was rebuffed, for the same reason that an earlier merger fell apart. Americans did not want anything going to Frankfurt.
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US hedge funds and banks then forced Deutsche Börse to disgorge its war chest by way of reparations and forced out Mr Seifert. Euronext’s diplomatic Jean-François Theodore had a better reception at the LSE. The issue was only price. While Euronext’s bid plan dawdled through regulatory channels, however, it was bullied by hedge fund investors to pay a special dividend, making any bid much harder to finance.
By then the Americans had got their act together. Almost singlehandedly Goldman Sachs had arranged for the NYSE to demutualise and gain a listing by merging with an electronic trading system backed by Goldman, which had the technology.
Nasdaq acted first in Europe by buying a blocking stake in the LSE, helping to drive LSE shares from £4 to nearly £13 in a few months. The NYSE settled for a “merger of equals” with Euronext, though the NYSE may have wanted Liffe most and outsiders saw a New York takeover.
Hedge funds played a key role. One had 9 per cent of Euronext and 10 per cent of Deutsche Börse and backed a vain plan to merge the two. Atticus Capital had 6 per cent each of the NYSE and Deutsche Börse and 9 per cent of Euronext Even so, the LSE is having nothing to do with Nasdaq. And continentals still hanker for a European merger that will yield real cost savings.
Four Wall Street and three European banks, together accounting for half LSE turnover, then unveiled Project Turquoise. The plan, or threat, was to start a pan-European mutually owned exchange to undercut fees charged by what the banks called “monopolies”.
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Project Turqouise would be of no benefit to private investors and might widen the margin between buying and selling prices. But it hit exchange share prices long enough for Nasdaq to pounce on the LSE, happily backed by Wall Street money but at a price that will make no sense if Project Turquoise ever gets anywhere.
This is where the conspiracy theory breaks down. The next deal is all that matters. Investment banks as owners wanted the LSE to demutualise and maximise profits to make a capital gain. They want monopolistic mergers because deals create fees and trading profits. They want their own exchange because they are greedy. Myopia rules.
graham.searjeant@thetimes.co.uk
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