Resisting the urge to merge

 by Lynn Strongin Dodds 

Bigger is not always better. Ask the European Commission which is in the habit of blocking mega mergers with the Deutsche Börse /London Stock Exchange alliance being the latest to fail. However, as these behemoth exchanges are likely to look for other suitable matches, smaller bourses such as Aquis Exchange are nimble and lean enough to focus on the task at hand and take advantage of opportunities.

Although “innovate or die” has become the mantra in the exchange world, the bigger exchanges are under pressure to add scale and often management’s time is absorbed with either brokering a deal or trying to make a merger work. This is certainly not an easy task given that the failure rate sits between 70 percent and 90 percent, according to collated research and a recent Harvard Business Review report. Integrating different businesses, IT frameworks and operational processes is never simple but often meshing two cultures is overlooked and can be the undoing of what seemed like a perfect union.

In the meantime, smaller exchanges may have their own challenges but they also can tap into their home grown culture to develop new and creative solutions to break the traditional exchange mould and expand their client base. Creative thinking is not just advanced by a selective few but is encouraged throughout the organisation while decisions do not have to go through a laboured management chain which can delay new products to market.

Aquis Exchange, for example, quickly caught the market’s attention with a new mobile phone-style “monthly subscription” approach to trading fees, but the ban on aggressive non-client proprietary trading proved that it was able to truly think out of the proverbial box. It was a bold move because this type of high frequency proprietary trading activity is typically viewed as a key element of a diverse and liquid order book. However, it has paid off as market share has rocketed and now (May 2017) stands at some 5% of the Norwegian top index, 4% of the Swiss, Swedish and Danish ones and over 3% in Italy.

As 2017 unfolds, there is no doubt that the world’s biggest exchanges will continue to be on the prowl, but market participants should not underestimate their smaller counterparts who are breaking new ground.