Trading blocs - what next for the stock exchanges?

Emerging markets will drive the next wave of transformational change and deal-making in the exchanges sector, says a latest report from PwC

According to a new report by PwC, ‘Trading blocs – what next for the stock exchanges?”, emerging markets will play a defining role in the exchanges sector. The report suggests the most viable growth options for Western exchanges are to focus on developing post-trade clearing and settlement capabilities or fostering ties with emerging market players.

High operating leverage and heightened competition have suppressed margins across the sector and will continue to provide a compelling economic rationale for consolidation. However, as strict rules limiting the level of foreign investment in Indian companies continue to be upheld, the two leading Indian stock exchanges, the Bombay Stock Exchange and the National Stock Exchange, are unlikely to join the consolidation wave.

Harsh Bisht, Executive Director and Leader – Banking & Capital Markets, PwC India said:

“Over the next five years, significant M&A activity will be driven from the emerging markets as local exchanges seek growth opportunities outside their home markets.”

“Strong economic growth is likely to lead to the focus of all future activity on the stock exchange shifting towards India. Securities trading activity will inevitably accelerate as the country’s economy continues to grow and increasing numbers of wealthy consumers seek to invest in the capital markets.”

In the Asian context, however, hurdles still remain due to a lack of a regional regulator. As a result, Asia has not developed the cross-border market liberalisation measures that would pave the way for more straightforward international mergers. In addition, Asia’s exchange industry does not rely as heavily on electronic trading platforms as those in the West; hence it is likely that the status quo will be maintained in the short-term before the technology gap is closed. However, it is only a matter of time before demutualisation gains ground and regulatory hurdles are broken down.

Some other key messages in the report are:

• Consolidation among the Western exchanges will move towards an end game, with the key hurdles to further M&A being political and regulatory opposition.
• Some specialist European and US exchanges have chosen to remain out of the M&A race.
• Sustainable trading margins and concentration on local capital markets have allowed these Western exchanges to focus on organic growth strategies.
• Recent European and US regulatory changes have on the one hand increased competition, while on the other, opened up new growth opportunities within the derivatives markets.
• Maintaining competitive IT platforms is paramount if exchanges are to continue attracting customers in what has increasingly become a buyers' market. Those that are constrained from engaging in M&A are likely to enter into technology sharing initiatives.