Tuesday, 17 May 2011

The Toronto and London stock exchanges want to merge. Let's ask why?

The real issue is who will benefit from the TSE/LSE business merger?
by Tom Thorne
When the London Stock Exchange (LSE) was founded in 1698 in a coffee house where John Castaing held court and traded stocks and speculated on commodities with his friends basic fundamentals of fair trading were developed. These casual beginnings soon became an institution by the mid 1700’s developing as the British Empire expanded around the globe. All the rest is history as London became a world financial centre during the late 18th and19th centuries. 
The Toronto Stock Exchange has a natural historic connection to the LSE. Before there was a stock market in Toronto much of the business conducted in the Canadas was through the LSE at the Empire’s centre. The first inklings of a separate stock exchange in Toronto was about 1852 but the real TSE starts in 1861 and really gets rolling by 1871 and finally incorporated by an act of the Ontario Legislature in 1878. Its growth follows the LSE patterns at the same time in history. We shouldn’t forget that there was an earlier stock exchange in Montreal before the TSE got rolling.
The TSE and LSE have a history together so this merger talk is quite natural. The contemporary merger however, is generated by the technical ability to trade 24/7 by computers. The markets round the world never asleep as they trade world wide all the time in different time zones. Stock and commodities markets are driven by program trades that act whenever their parameters are met globally so this $3.5 billion business merger will not affect anything that is happening on a global scale already. We might ask what is the point of this merger since in trading terms the computerized  systems are already merged.
Mergers are not new...but do investors benefit?
Mergers of stock exchanges are not new. The LSE merger with Borsa Italiano in 2007 is such an example. However it can be argued that the mergers do not affect the trading of stocks, bonds, or commodities that goes on between exchanges no matter who manages what stock market groups or who merges their managements and perhaps their technical systems. The real question for investors and regulators to ask is who benefits from this business and management merger?
The trading networks exist no matter who manages them and where they are. The real questions are whether the principles of stock exchanges still are maintained by  these mergers. Let’s review those principles. The roles of any stock or commodity exchange is to provide the following functions and procedures:
    1. Raise capital for businesses
    2. Mobilize savings for investment
    3. Facilitate company growth
    4. Create profit sharing
    5. Provide a healthy financial environment for corporate governance
    6. Create investment opportunities for small investors
    7. Provide government capital-raising for development projects
    8. Be a barometer of the economy
    9. Provide an environment for positive speculation
As we all know the recent world wide financial meltdown missed most of these points. So any merger needs to examined from a fundamentals point of view. Who stands to gain from this change? That question to this point has not be answered for the LSE/TSE merger.

© Copyright 2011, Tom Thorne, All Rights Reserved.

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