x Abu Dhabi, UAEWednesday 17 January 2018

Exchanges worldwide feel the urge to merge

Focus: London Stock Exchange's proposal to take over Toronto's bourse is of interest to shareholders in the Gulf and indicative of a wave of such movements.

Jeff Singer, the chief executive of Nasdaq Dubai, says three factors are driving merger activity. Satish Kumar / The National
Jeff Singer, the chief executive of Nasdaq Dubai, says three factors are driving merger activity. Satish Kumar / The National

Jeff Singer is chief executive of Nasdaq Dubai, having joined the company in 2008 when it was called Dubai International Financial Exchange. He has since been a leading advocate of reform and consolidation of UAE markets.

We are witnessing an unprecedented wave of merger activity among international stock exchanges. Why?

Three reasons. First, money is international but exchanges are local. In an increasingly globalised world, investors can move money around easily so cross-border mergers make sense to facilitate the flow of funds. Second, exchanges have demutualised, meaning they moved away from ownership by their members to becoming companies owned by shareholders, and shareholders expect profitability and growth. Nasdaq demutualised and went public in 2005, followed by the New York Stock Exchange in 2006; most exchanges in the world now are also publicly listed companies. When Nasdaq and NYSE couldn't grow any more in the US, going global was the next best step. Third, exchanges are one of those industries that are scale driven. An infrastructure that can handle a million trades a day can just as easily handle 10 million with no extra cost. The latest bout of merger bids has focused very much on derivatives trading, which is much more profitable for exchanges than equities trading. Nasdaq OMX's interest in NYSE Euronext - withdrawn due to anti-trust laws - was driven in part by NYSE Euronext's options business.

As shareholders in the London Stock Exchange (LSE), Gulf institutions have an obvious interest in the outcome of the proposed merger with TMX of Canada. What's your view of that situation?

The political opposition in Canada to LSE's bid shows exchanges play an important role in the national economy. Many people perceive them as national champions, rather like airlines. The Singapore exchange's bid for Australia's bourse was defeated earlier this year by the same sentiment among Australian politicians. Governments are quite right to look carefully at foreign takeover bids, as these can lead to capital markets expertise and jobs leaving the country. Some Canadian banks and pension funds are currently placing an offer for TMX to rival the LSE's.

Nasdaq Dubai and Dubai Financial Market (DFM) have taken significant steps towards greater consolidation recently. What's the next stage for UAE markets?

There is a clear business case for considering further consolidation of the UAE's stock exchanges. Nasdaq Dubai's outsourcing of its trading to the DFM platform last year has already been a success, by increasing the share of retail trading on Nasdaq Dubai to more than three times last year's levels. Whether, and when, more consolidation will take place in the UAE is a decision for the owners of the exchanges to take, not the exchanges themselves. Whatever is decided, the UAE will benefit by further supporting its exchanges so the country becomes a centre of capital markets activity and excellence, attracting more talent from overseas and creating new jobs locally in investment banking, broking, advisory, and related capital-market areas such as law and accounting. If too many UAE companies go abroad to list on exchanges, it will be harder to build the UAE's capital markets successfully.

There is much speculation that UAE and Qatar will join the MSCI Emerging Markets Index soon. How important is that for regional markets?

It would automatically attract new money to the UAE markets, as some international funds are mandated to invest in MSCI emerging markets that may not invest in frontier markets. However, the amount might not be all that significant - about US$1 billion (Dh3.67bn) by some estimates. The MSCI reclassification is not a magic wand to attract institutional liquidity. It is more important for the UAE to maintain its focus on providing the infrastructure international investors want. This includes improving our clearing and settlement mechanisms, which we are doing, and providing innovative investment opportunities. In addition, good short-selling rules as well as stock lending and borrowing capabilities would allow investors to profit and stay in the market irrespective of it going up or down.

How will world exchanges look in, say, five years' time, and where will Gulf exchanges fit into the picture?

I believe there will be fewer exchanges globally than now. But there will still be a number of separate entities competing fiercely with each other. Across the Gulf, I do not expect radical consolidation, but I do believe they will partner each other and modify their systems and rules to be more attractive to global investors.