More Financial Globalization: Proposed Deutsche Boerse AG-NYSE Euronext Takeover

The trend towards further consolidation of global stock exchanges continues with the proposed takeover Deutsche Boerse AG's of NYSE Euronext.

Integrating national stock markets has been part of the ongoing financial globalization process that will only deepen the correlation of price actions among global bourses. In 2007, I wrote,

With the revolutionary advances in the field of communications and information technology-the advent of on-line electronic trading platforms makes it possible for real-time electronic transactions regardless of the geographical distance.

Grounded on this premise, the major exchanges appears to be in a rush to integrate financial services, to diversify and expand their market coverage, reduce transaction (bookkeeping, clearing and settlement) costs by achieving the economies of scale, to eliminate further inefficiencies by way of human intervention, provide for financial depth by attracting global investors (to augment the demand side), traders and listing companies (to increase supply side), to improve on liquidity by easily matching buyers and sellers, and finally, adapt to the ongoing changes in marketplace by being accessible to the growing significance of institutional investors [pension funds, hedge funds, mutual funds and insurance companies] as compared to retail investors in the past.

And stock markets have been evolving—the introduction of dark pools has also been prodding for such mergers as competition deepens.

Nevertheless with the proposed merger, the Wall Street Journal editorial rues on the apparent the loss of America’s leadership, they write

The merger is nonetheless one more lesson in how easily capital, both financial and human, can relocate. It's no coincidence that the heavily regulated equity business has languished or moved out of the U.S., while lightly regulated derivatives markets have boomed in the United States and elsewhere.

In the early 1990s, American exchanges played host to half of the world's new public companies. Last year, according to Dealogic, U.S. exchanges hosted 171 initial public offerings worth a total of $45 billion. But this U.S. deal-making was dwarfed by the action overseas, where 1,295 companies went public with a total value of $237 billion. The iconic NYSE now lags behind two Asian exchanges in IPO volume. This is partly the result of more rapid growth in developing economies, but it used to be that foreign companies wanted to float their shares in the U.S. Now they're as happy in Hong Kong.

U.S. over-regulation is certainly to blame here, especially the 2002 Sarbanes-Oxley law and its multimillion-dollar compliance burden on public companies. The Securities and Exchange Commission's own exhaustive 2009 survey of U.S. and foreign firms showed that the burden of complying with Sarbox remains a major deterrent to going public in the United States. Yet the agency still hasn't made a serious effort to pare these burdens. (bold emphasis mine)

The lesson is clear: interventionism diminishes competitiveness