One supposed reason for the deal was that without it both the LSE and Deutsche Börse viewed themselves as takeover targets. Now we are about to see whether that is truly the case.
There are only three other global operators with bigger equity market capitalisations than the British or German exchanges. Looking at possible buyers raises a host of issues.
Hong Kong Exchanges & Clearing would face political sensitivities about its links to China while shareholders may worry about its difficulties in integrating the relatively small London Metal Exchange that it purchased in 2012 for £1.4bn.
CME Group, the world’s largest exchange by market value, has a hugely defensible domestic position, is growing and has operating margins of 64 per cent that would be diluted by any deal. Purchasing the LSE would run into antitrust or regulatory issues, if not a revolt by the users, over uniting the world’s two main clearing houses for interest rate swaps. Deutsche Börse has a lot of business — stock exchanges, settlement — that the Chicago giant has little interest in. The CME also has no incentive, nor has it ever shown great inclination, for a big overseas deal.
That leaves Intercontinental Exchange, the only exchange to successfully execute a major cross-border deal (the purchase of NYSE Euronext) since the financial crisis. Antitrust rules would prevent a purchase of the German group, but it has shown interest before in the LSE and many US investors expect it to return before Christmas.
However, the LSE clearing house, is a stumbling block as it is 40 per cent owned by banks. This entity — SwapClear — also has a separate governance and profit-sharing agreement with its bank shareholders. That’s a significant barrier as ICE always wants full control of assets.
Another driver of exchange M&A is the ability to cut costs. Privately ICE remains concerned at how long it would take to upgrade the IT systems for LSE’s clearing businesses. Crucially, Brexit means any LSE deal is too sensitive right now.
Small deals are probable and NEX Group, the new Michael Spencer trading and technology vehicle worth £2.1bn, is frequently mentioned. But Mr Spencer, the largest shareholder and kingmaker, is in no mood to sell right now. Perhaps in another three years.
In the wake of the deal collapsing, Deutsche Börse needs a London hedge post-Brexit negotiations. The obvious solution is to buy the struggling CME Europe, whose future is under review in Chicago.
And what of the deal’s big dream, to create “a leading venue for capital formation and the facilitation of economic growth”? This is a problem for Europe — (less so London) but the continent needs to create a more enticing environment for business and trading.
LSE listings may be in a lull but London still has a chance of winning the historic Aramco listing — a major statement of strength. A real problem is access to early-stage financing for small companies, which create new jobs. Slamming together stock exchanges into one megamerger would make no difference in this respect.
It will be no surprise if both the LSE and Deutsche Börse are independent companies come March 2019. The LSE and Nasdaq, under long-serving chairman Bob Greifeld, have shown it is possible to make very excellent returns for shareholders without a big deal.
Also, the two exchanges can compete globally in other ways. Pools of liquidity in global markets are fragmented by instrument. London is a world financial power. The London exchange’s LCH clearing house dominates global OTC swaps clearing, while Deutsche Börse has the Stoxx indices.
In the end, supply and demand — plus access — are what create markets, not the designs of regulators, executives or their overpaid armies of advisers.