Too big to merge?

Deutsche Börse and NYSE Euronext are likely to face tough questions about their dominant market positions after the two groups announced last week that they were in "advanced talks" to merge and create the biggest exchange group in the world.

Alberto Pravettoni, a managing director at LCH Clearnet in London, which acts as a central clearing house for major exchanges in Europe, said competition watchdogs are likely to be concerned about the dominant grip the merged entity would have over the European market for equity options contracts - lucrative financial instruments which enable traders to place bets on whether shares will go up or down.

"I believe the competition authorities may look at that. It is more than 90 percent of the futures and options market in Europe," Pravettoni told Deutsche Welle.

According to data from Eurex, the Frankfurt-based derivatives arm of Deutsche Börse, the exchange traded more than 308 million equity options contracts in 2010 - that was 64 percent of the overall European market. Meanwhile NYSE Euronext's London International Financial Futures and Options Exchange (Liffe) oversaw the trading of 175 million contracts last year.

Pravettoni said the dominant position a combined Deutsche Börse and NYSE Euronext entity could have in the equity options market in Europe could also spur new trading venues in the region to target this potentially lucrative derivatives market.

New competitors to react

"History is teaching us that once you have monopoly-like situations the markets try to react and create competitors," Pravettoni said, citing the rise of Turquoise, Chi-X and Bats - relatively new high-speed trading venues catering to computer-based traders - in Europe's cash equities market as an example.

Simon Holmes, partner and head of the EU and Competition department of the London office of international law firm SJ Berwin, said he thought it was "very likely" that the proposed tie-up between Deutsche Börse and NYSE Euronext would be subject to a "phase two" inquiry by the European Commission, which could last between three and five months. The relatively short phase one review is usually completed within seven weeks.

"The most obvious area where there are competition issues is in exchange-traded derivatives, where these two exchanges have a near monopoly in Europe," Holmes told Deutsche Welle. "The question is whether the relevant market is wider than just Europe and how much competition there actually is."

Holmes suggested that the two exchanges could placate regulatory concerns over competition with "remedies" such as the sale of NYSE Euronext's London-based Liffe exchange.

‘Subject to regulatory approval'

In an official statement made when Deutsche Börse announced plans for the tie-up with NYSE Euronext, the exchange said: "Any transaction would be subject to regulatory and shareholder approvals, as well as other customary conditions."

The Economy, Transport and Development Ministry of the German state of Hesse, which would have to approve the tie-up, was not available for comment at the time of writing.

The US Justice Department would also play a part in reviewing potential antitrust issues along with the Securities and Exchange Commission, which would have to approve the deal. Both organizations declined to comment.

Author: Joe Morgan
Editor: Sam Edmonds