NEW YORK ( TheStreet) -- The failure of MF Global will not change the way Wall Street moves stocks and derivatives because many of the exchanges where the now defunct trading behemoth prowled were already undergoing big changes. For example, the New York Mercantile Exchange and Comex lost their leading trader when MF Global filed the eighth largest bankruptcy in U.S. history on Halloween, while the Chicago Mercantile Exchange ( ICE), Australia's Sydney Futures Exchange and London -based IntercontinentalExchange ( ICE) lost a top three trader.
Yet all those exchanges were already in the midst of consolidation talks that will have a much larger impact on Wall Street for decades to come. Consolidation will be key as major stock, commodity, derivative and bond trading servicers look for ways to grow their product offerings and regional presences, without falling afoul of regulators, in an increasingly tough task. On Monday, the London Stock Exchange announced it would buy a remaining 50% stake in the FTSE Group, its British flagship FTSE 100 Index and thousands of other indices, in a similar move to an October alliance between McGraw Hill ( MHP) and CME Group ( CME) to create an venture between the owners of Standard & Poor's and Dow Jones indices. With FTSE, the LSE will add thousands of new index products to its Turquoise electronic trading platform, meanwhile the Chicago Mercantile Exchange will new exclusive ways for traders to manage risks in its S&P partnership. Previously, the CME cut a deal to exclusively offer the CBOE's Volatility Index, a prolific gauge of today's "risk on" and "risk off" trading world. Flagship index combinations and a push by trading exchange's into high margin derivatives trading and financial infrastructure businesses such clearing will be the M&A trend, as mega-exchange mergers pause, say analysts. Less-high profile venture, index and infrastructure deals are in the cards, as a potential $9 billion merger between flagship stock exchanges like NYSE Euronext ( NYX) and Deutsche Boerse faces increased scrutiny by regulators, says Jillian Miller of BMO Capital Markets. "I think that exchanges will keep looking into acquiring companies that better allow them to access index products, clearing and the derivatives post trade world," says Miller. The need to grow clearing, financial IT and exclusive index offerings for equity, future and options trades may make targets out of the clearing and trading technology businesses of CBOE ( CBOE), LCH.Clearnet, IntercontinentalExchange MarketAxcess ( MKTX) among others, while it may also one day bring index products for foreign exchanges like Sao Paolo's Bovespa index closer to U.S. retail investors. "At some point when the consolidation across borders happens, I think that retail investors are going to have a broader products suite to trade," says Miller.
Such consolidation may come in mergers between foreign exchanges like Deutsche Boerse's purchase of Stoxx, or in co-investments like U.S. powerhouses such as the CME Group's $620 million partnership Brazil's BM&FBovespa and its futures partnership with Bursa Malysia in 2009. These partnerships may one day bring together a wider offering of index, exchange and clearing platforms in places like Brazil, Singapore and other parts of Asia, according to Miller. In October, the Singapore Exchange announced it would buy the Australian Securities Exchange for $8.3 billion, however a previous bid blockage, competitor outcry and investor skepticism about the deal signal that the merger may yet collapse. Meanwhile, there are further signals that the NYSE Euronext and Deutsche Boerse tie up may fail like other consolidation attempts including a bid by the London Stock Exchange for the Toronto Stock Exchange and a bid by Nasdaq OMX ( NDAQ) for the NYSE. "What's been interesting is the number of failed deals in exchange consolidation, as nationalistic or regulatory issues have squashed a number of deals recently," says Chris Allen an analyst with Evercore Partners. Competition authorities have highlighted access to financial clearinghouses, the ability for traders to find liquidity for products on competing exchanges and market share concentration as some of their biggest concerns in slow-playing deals. As full-fledged exchange M&A between iconic financial marketplaces like the 219-year-old Big Board at the NYSE potentially falter as a result of competition alarms and simple nationalist politics, less glamorous deals like September reports that the Singapore Exchange and LSE have assembled a bid for the less-known on the London Metals Exchange may be more realistic. The ever-present compulsion to grow and the need to update offerings to match new regulatory frameworks like the Dodd Frank Act may drive future activity. Increasingly, partner deals and joint ventures are a way for exchanges to bolster their offerings and competitiveness without tripping regulatory wires. "
I n general, exchange consolidation is not so different than consolidation in other industries -- it's typically about scale, product or regional diversification. The index deals we have seen are being driven by a desire to increase non-transactional revenues (which can be volatile) and increase revenues from a steadier business area," says Allen. To be seen is whether missing MF money will be retrieve. Meanwhile, there is little doubt that further money will be thrown around as exchanges and the infrastructure piping of the global financial system are repositioned to match the post-crisis and increasingly global trading world. -- Written by Antoine Gara in New York