Well, it looks like it’s going to happen. The much heralded exchange merger of the century combining Germany’s Deutsche Boerse with the New York Stock Exchange is just about a sure thing. Rival deals have been relegated to the dustbin of history while the mega merger is on the cusp of becoming reality. While most of the hype has been exceedingly positive about the merger, just what are the potential risks for the retail investor?
First, let’s take a look at the positive side. The merger may improve the performance of the exchanges as they will be in better sync with each other. Costs may lower as a function of consolidation, particularly in regard to mutual funds, and investors may have greater investment choices. While these positive happenings may occur sometime in the future, those who study the effects of exchange mergers believe any benefit for retail investors will be a long way off. Ulf Nielson, Associate Professor at the Copenhagen School of Business and author of his Ph.D. thesis Stock Exchange Mergers and Liquidity: The Case of Euronext, told Forbes, “It might increase investment choices for individual investors sometime in the future – but it could take a decade for all this to materialize. In terms of right now, there’s not much for the individual investor. It will make life easier at some point in the future.” Nielson went on the explain, “The main effect on household investors is that they will have more investment choices. They will have easier access – that’s the keyword. A U.S. investor will have an easier time investing in stocks listed in Frankfurt, for example, than they did before.” Charles Rotblut, Vice President of the American Association of Individual Investors and editor of the AAII Journal, agrees with Nielson in his statement to Forbes. “Right off the bat, I don’t think it’s going to have a big change. Even if the NYSE uses this as an opportunity to make even more trading electronic than it already is, for most individual investors, what happens on the trading floor does not have a direct impact.”
All of these potential benefits sound great, but when you get down to the nitty gritty, the picture isn’t as bright. The primary issue appears to be the regulatory differences between the two exchange cultures. In the United States retail investors are protected by solid rules and regulations. In Europe, the interests of retail investors are simply not represented and the protections are principle based instead of in black and white. This is due to the fact that retail interest in the markets is far less in Europe than in the US therefore there is less incentive to make sure retail interests are protected. Potentially higher costs is another seldom thought of risk factor.
According to Chris Nagy, head of order strategy and government relations for TD Ameritrade, we may see trading costs lowering in the short term, but due to asymmetrical clearing operations, prices may increase. Nagy explained to Trader’s Magazine, “The cost to clear could increase significantly if DB chose to push their clearing operations onto the NYSE. Essentially, they would have the ability to force you to go to their clearing. Today, NYSE uses DTCC, which is kind of an industry-owned consortium. It creates a lot of potential issues. If you have a disaster between two major agencies, how is that clearing process going to work? Ultimately, if they garner the volume, then you’re forced to go to them.”
As you can see, everything isn’t as rosy as it appears at first glance with the merger. Time will tell how the various risks for retail investors are handled by the new giant exhange.
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