London Stock Exchange to merge with Deutsche Börse

United Kingdom
On Wednesday 3rd May, 2000 the London Stock Exchange (LSE) and the Deutsche Börse officially announced their plans to merge and form Europe's largest stock exchange, to be called iX. In addition to these plans, the LSE, the Deutsche Börse and Nasdaq have signed a memorandum of understanding to create a pan-European high-growth market.

Key facts about the LSE and Deutsche Börse merger

- The merger will create Europe's largest stock exchange, comprising 53% of traded volume and, through Eurex, will create the biggest derivatives market worldwide.

- All of the LSE and Deutsche Börse's business interests will be merged with the exception of Deutsche Börse's 50% stake in Clearstream.

- iX will provide comprehensive trading and information products for equities, commodities and derivatives, but with an increasing emphasis on e-commerce businesses.

- iX will be based and managed in London. The main blue-chip market will be in London with its strong regulatory structure, whilst the technology market will be based in Frankfurt.

- Don Cruickshank, the current chairman of the LSE, will become chairman of iX. The chairman of the Deutsche Börse, Werner Seifert, will become chief executive.

- The electronic trading platform for all cash markets will be Xetra. It is anticipated that SETS, which has reportedly cost the LSE £1 billion, will be abolished early next year.

- Both the LSE and the Deutsche Börse have agreed to support initiatives to build a single trading platform but, until then, settlement will continue to be provided by Clearstream and CrestCo Limited.

- The LSE and the Deutsche Börse are already in discussions with the Milan and Madrid stock exchanges about the possibility of joining the new exchange next year with other exchanges set to follow suit. (The Paris Bourse is reportedly in talks with the New York Stock Exchange).

Key facts about the alliance with Nasdaq

- The concept behind iX is to create a 24-hour market which will cover key European, - Asian and US time zones so that investors will have direct access to stocks and IPOs globally through one trading platform.

- The alliance would be three-pronged, with the European contribution being provided by the alliance between the UK and Germany (techMARK and Neuer Markt), the Asian contribution would be provided by Nasdaq Japan, and Nasdaq (which is the second largest market in the US and heavily weighted towards high-tech companies) would constitute the US contribution.

Although the final deal between the three has yet to be formalised it has already been viewed cautiously by bankers, who see the idea as a "vision", but are sceptical as to its realisation. Many obstacles litter the path to success - most significantly, that resurrecting a trading platform will require much time and money.

Will all shares be listed in Euros?

This is probably the most contentious issue on the merger agenda and a clear decision as to the outcome has yet to be made. The LSE has stated that companies will be able to choose which currency their shares will be quoted in and institutional investors will almost certainly support sterling as their currency of choice due to the need to match their sterling assets against their sterling liabilities. However, concern has been expressed by those worried that splitting into euros and sterling would increase the costs of trading, which may damage business. If shares are traded in euros, directors will be hard pressed to convince shareholders (the largest group of whom are pension funds), that listing in euros is the way forward, particularly at a time when the euro has hit an all time low.

Despite the difficulties that will undoubtedly arise in this respect, the merger has, on the whole, been cautiously welcomed and the merger has won the support of senior analysts and fund managers.

Why are the world's exchanges looking to form alliances?

- to broaden their client base,

- increase product range,

- to increase liquidity,

- to make trading more user-friendly,

- because the demise of open-outcry floors has put pressure on brokers to use more cost effective electronic trading platforms

- because the rise and rise of the internet has overshadowed the profile of traditional stock exchanges(e.g. in the US there are plans for a derivatives exchange to list live cattle futures and options as well as stock index futures) - because there has been an explosion of OTC products which has significantly altered the nature of international finance transactions - swaps now comprise one of the largest markets in the world but they are not traded on any exchange.

This trend towards stock exchange alliances has been highlighted by recent reports linking the LSE with the Buenos Aires and Sao Paulo exchanges and the recent announcement by the Paris, Amsterdam and Brussels bourses to merge in the future. However, until any formal announcements are made the extent to which traditional stock exchanges become a thing of the past will not be known.

For further information, please contact Peter Smith, partner, on Tel: 020 7367 2816 or e-mail: