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The Largest Exchange Operator That May Never Be

On January 10th, 2012, it was reported that European Competition commissioner Joaquin Alumnia would recommend blocking the proposed merger between NYSE Euronext and Deutsche Boerse by the European Union’s Competition Commission at its February 1st meeting. For 11 months, NYSE’s Duncan Niederauer and Deutsche Boerse’s Reto Francioni have been trying to quell Mr. Alumnia’s concern that such a merger would give the resulting exchange control over approximately 90% of Europe’s traded derivatives. If allowed to proceed, the merger would create the world’s largest stock exchange operator.

On December 22nd, 2011, the United States Department of Justice announced that it would approve the merger contingent upon Deutsche Boerse’s divestiture of its 31.5% ownership share of Direct Edge, the “fourth largest stock exchange operator in the U.S.” Sharis A. Pozen, Acting Assistant Attorney General in charge of the DOJ’s Antitrust Division stated, “[w]ithout the divestiture and other restrictions obtained by the Justice Department, a combined NYSE and Deutsche Boerse entity could influence the actions of Direct Edge, and thereby lessen the zeal of an aggressive and innovative exchange competitor.

Similarly, European commission officials have recently hinted that divestiture of one of the two exchange operators European derivative trading operations, NYSE’s Liffe or Deutsche Boerne’s Eurex, may clear the way for the merger. However, neither company seems amenable to ridding themselves of their derivative arms.

The companies claim that allowing the merger would help Europe maintain its position as a global financial center and result in cost savings for banks and other financial institutions that use both exchanges.  They also argue that most derivative trading occurs not on exchanges, but directly between banks and other financial firms. Furthermore, the operators claim that the commission should not focus solely on the European derivatives market, and instead focus on global derivatives trading

However, opponents of the merger, including NASDAQ OMX and the London Stock Exchange, claim that the merger will dissuade companies from entering the derivative market.

Despite Mr. Alumnia’s objection to the merger, he will still need to convince the 27 members commission in order to block the deal. However, it is rare for the director’s recommendation to be overturned. The final decision is slated to be issued sometime around February 9th.

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