Quick View: Bulking up – is it worth it any more?

The biggest exchange merger ever attempted looks like it’s hitting the buffers.

Europe’s antitrust authorities have blocked the Deutsche Börse-NYSE Euronext deal, our sources tell us.

They argue that the combination of the two groups’ derivatives exchanges Eurex and Liffe, would snuff out competition in European derivatives. They have suggested that the two groups divest a derivatives business – probably Liffe. But that would kill the rationale for the whole deal since derivatives is the most lucrative part of an exchange’s business.

Brussels dug its heels in, in spite of two sets of concessions offered by the two groups designed to alleviate competition officials’ concerns.

Those focused on the combined group allowing rivals access to its German clearing house – in other words, prising opening the “vertical silo” of an exchange owning a clearing house, this controlling the “food chain” from trading to post-trade.

This is not over yet. Deutsche Börse and NYSE Euronext will now lobby at the political level hard to persuade the EU’s commissioners to wave the deal through nonetheless.

And this is much more politicised than many other previous antitrust cases, given the sector involved – financial services – the eurozone crisis and the febrile atmosphere in European capitals over a possible financial transactions tax.

Whatever the outcome, there are two key takeaways.

First, it sends a strong signal that the days when exchanges could bulk up to get bigger may be over. Regulators have had enough, after a decade or more of mergers that have created giant exchanges with increasing grip on key markets like derivatives. They seem to want more competition, and less concentration.

Second, Brussels antitrust staff decided that for the purposes of making its antitrust decision the focus is Europe, not the global market for exchange-traded derivatives.

They ignored compelling arguments by the Börse and NYSE that the combined Eurex and Liffe would still compete on the global stage for customers with the likes of CME Group, the big US futures exchange.

But by setting the market definition as Europe, Brussels has arguably shot Europe in the foot.

Ignoring the presence of the CME, operator of the Chicago Mercantile Exchange, is like saying that BMW doesn’t compete with Toyota and only battles Mercedes for the European luxury car driver. It makes no sense. Any carmaker will tell you they compete in a global market; the same goes for futures – all the more so since trading takes place 24/7 and respects no geographical boundaries.

Moreover, if Brussels wants to ensure there is more competition in futures trading and clearing, blocking DB/NYSE on the grounds that it would stifle competition in Europe is an odd way to go about it.

We will have to see what the actual recommendation says on this, but the way to ensure competition would be to break open the silo – something that doesn’t seem to have been the focus on the antitrust case team after all.

As it is – and assuming DB/NYSE fail to win round enough EU commisisoners to overturn the antitrust decision – NYSE Euronext and Deutsche Börse stay as standalone businesses. The Börse silo remains intact and it is just as hard as ever for the London Stock Exchange to try and compete against Liffe and Eurex in futures contracts as it is today.

All that’s left to force a market structure change are new European regulations known as “Mifid” and “Emir” – together making Europe’s equivalent of the Dodd-Frank act in the US. They propose to force clearing houses to open up to competitors. But they are a long way from being implemented.

This whole business underscores the big lesson: exchange mergers just aren’t worth it.