Nasdaq Might Be Eyeing London Stock Exchange

The

Nasdaq Stock Market

is reportedly in talks to buy Europe's largest stock exchange, the

London Stock Exchange

, in what would mark its latest effort to build heft across the Atlantic.

Considered the key to regional dominance, the London Stock Exchange has been courted by other players recently, including Germany's

Deutsche Boerse

and pan-European exchange

Euronext

, which links together the Paris, Amsterdam, Brussels and Lisbon markets and has a cooperation agreement with the

New York Stock Exchange

.

Both Nasdaq and the London Stock Exchange declined to comment on the reports. "We talk to everyone all the time and have been for quite some time," said Nasdaq spokesman Scott Peterson. "Beyond that we don't comment on market speculation or rumors."

A representative for the London exchange took the same tight-lipped approach. "This is just the latest speculative story. It's the fourth in the last few weeks," said the London exchange spokesman, who wouldn't comment further.

Scale Matters

The Nasdaq has been searching to create a bigger presence in Europe for several years.

Nasdaq Europe

and the

Berlin Stock Exchange

agreed to take a 10% stake in each other's operations and create a common system for share-trading last fall in a bid to challenge Germany's dominant Deutsche Boerse. Nasdaq launched Nasdaq Europe in March of last year after it was unable to achieve the kind of scale it had hoped for with the acquisition of Easdaq, a European version of Nasdaq.

The Nasdaq and the London Stock Exchange also talked about hitching up in the 1980s, but the talks fell through.

The London Stock Exchange lists 2,789 companies and handled 2.9 million trades of domestic equities and 1.3 million trades of international equities in March. Last year it handled 50 million trades. Shares of the London Stock Exchange, which went public last summer, have risen steadily since late September.

"If you want to be the dominant player in Europe, captive market cap is the name of the game, so everybody wants the London Stock Exchange, including Nasdaq," said Benn Steil, a senior fellow at the Council on Foreign Relations, a nonprofit think tank and research group.

Nasdaq wants a bigger presence in Europe, despite a sluggish trading environment there, partly because of growing European interest in U.S. stocks. "The biggest cross-border investment taking place in Europe is to the U.S. rather than intra-Europe," said a London-based executive who didn't want to be named.

Oliver Hansch, an assistant professor of finance at Smeal College of Business Administration, part of Pennsylvania State University, said a union between Nasdaq and the London Stock Exchange might make a great fit.

"Nasdaq would presumably bring its technological expertise and innovative drive to the London Stock Exchange. The trading systems right now are pretty similar, with competing market makers providing the bulk of liquidity in most stocks," he wrote in an email. "For the largest stocks, the LSE uses a limit order book system (SETS) which operates in a manner similar to ECNs, which are a very successful and ever-growing part of Nasdaq. Integration should therefore be relatively smooth."

There Could Be Some Issues

Observers say a deal between Nasdaq and the London Stock Exchange would face immense obstacles, including Nasdaq's weakened financial condition and regulatory issues.

"Nasdaq is not in a good financial position right now," Steil said. "They're cutting prices every day; there's fear out there that the

electronic communications networks will go to an alternative display system. It's a risky venture because nobody knows what the future of Nasdaq is."

Nasdaq reported a loss of 12 cents a share

in its fiscal fourth quarter, reversing a profit of 9 cents in the year-ago period, and said it expects increasing competition this year.

Steil said he expects some sort of London Stock Exchange deal will be announced before the end of the year, but he suspects it would set off a bidding war. "If LSE and Nasdaq were to come to some agreement," he speculated, "others might offer to link up three ways."