http://jbone-canadianbusiness.blogspot.in/2011/07/incestuous-nature-of-globalstock.

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The Incestuous Nature of Global Stock Exchange Mergers

The worlds stock exchanges have changed considerably in the last decade: The typical government or member owned national stock exchanges have been largely replaced by forprofit, publicly listed exchanges. (Nielsson, 2010). In 1998, 38% of exchanges in the World Federation of Stock Exchanges were for-profit. In 2006 this figure was up to 75% (World Federation of Exchanges, 2007). The past few months have witnessed a paradigm shift towards the globalization and unification of capital markets through corporate merges. Today, stock exchanges have rules to ensure fair and efficient capital markets which protect investors, but they're also for-profit corporations which have shareholders. The New York Stock Exchange group (NYSE) became a for-profit corporation and began trading publicly on its own stock exchange on March 8, 2006 under the NYX ticker. On April 4 2007 the NYSE group merged with Euronext. They did so, because it appeared NYSE's local competitor NASDAQ was attempting to acquire the London Stock Exchange (LSE). The NYSE Group won Euronext over the offer of the German giant exchange Deutsche Borse, which was also attempting to acquire Euronext. This was the beginning of a financial battle of sorts between the Americans and the Germans. Euronext itself was formed on September 22, 2000 following a merger of the Amsterdam Stock Exchange, Brussels Stock Exchange, and Paris Bourse, in order to take advantage of the harmonization of the European Union financial markets under the EU. On November 25, 2008, Deutsche Brse and NYSE Euronext began merger talks which involved creating a holding company to buyout Deutsche Brse shareholders, then use Euronext to merge into the new corporation. The deal fell apart due to issues with valuations. As of today there is a pending merger of NYSE Euronext and Deutsche Borse (in effect the Germans buying out the Americans). NYSE Euronext shareholders will vote on Deutsche Brses all-stock deal (which the board of directors supports) on July 7, and Deutsche Brse shareholders will vote on July 13. On the Canadian scene, the Toronto Stock Exchange (TSX group) is the product of the merger of various exchanges from the various regions in Canada that used to be provincially

separate entities. The TSX group is the seventh largest exchange in the world in terms of market capitalization. In 2000 the TSX group became a for-profit company. In 1997 it became the second exchange in the world to go floorless (completely virtual) in terms of trading. In February of this year the LSE committed to a merger with the TSX Group. Last week the LSE merger fell apart due to mounting pressure from a hostile bid from the Maple syndicate (a group of 13 Canadian financial institutions). For now it appears maple has won.

Next step for the Maple deal is the Federal Competition Bureau and the provincial securities regulator who get a veto power over the entire merger. I do not cast light on whether these approvals will go forward (which I suspect they will). However, my concern is on account of a lesson provided from recent history that seems to be forgotten. When I was a teenager I would drive past this large red building near my home in Calgary. I remember one day the old building had a new, large, imposing gold sign on it facing out across Calgary: "Bre-X Minerals Ltd." (Bre-X). In a matter of months this mining company would cause serious and irreparable damage on Canadian investors and the confidence of the Toronto Stock Exchange in the eyes of the world. It was a calamitous, unfortunate and unforgettable blemish on Canadian capital markets. In 1995, Bre-X was a young mining company which reported an enormous gold deposit at Busang, Indonesia (on Borneo). Bre-X bought the Busang site in March 1993. This discovery send the stock price soaring. Originally a penny stock, Bre-X stock reached a peak at $286.50 (CND) in May 1996 on the TSX with a total capitalization of over CAD $6 billion. However, Bre-X collapsed in 1997 after the gold samples were found to be a fraud. It turns out the tested core samples were salted with gold. It was never discovered when, or by whom this event was perpetrated. The stock became worthless again, and Bre-X went down as the largest mining scandal in world history. It is also the largest stock fraud in Canada to date and no one has been convicted on account of the Bre-X scandal. Why is this connected? Lets look closely at the Maple plan. Maple intends to buy the Alpha Group, an alternative stock market that is owned by some of the same financial institutions in the Maple consortium. That would leave the single merged entity controlling 80 per cent of the equities market in Canada. This troubles me. 80 per cent of the equities market means the group of banks that comprises Maple, would be a type of pseudo police over the Canadian economy. While it is true the provincial regulators are the official watchdog of the securities market for now, the TSX also is insulated with important policies that play a large role in

ensuring the fairness and transparency of the Canadian securities market. Without conditions to break up this mammoth group, the Maple team is planning to get bigger. The ownership structure of Maple will likely change to include Royal Bank of Canada and Bank of Montreal which had been excluded from joining because they advised on the TMX-LSE deal. The rapid merging of stock markets has resulted in a paradigm shift towards the centralization of control between issuers, advisors and regulators under the same hat. These are separate roles in a fair, accountable and efficient capital market. The relationship between the regulated and regulators is uncomfortable aligned with the Maple and TSX group transaction. How are we to prevent another Bre-X when those who benefit from an unaccountable marketplace are the ones who set the internal market regulation? It is a ticking time bomb. Noted Toronto investment banker Bill Holland, chairman of CI Financial Corp., co-signed a public letter that supported the TSX-LSE deal and warned about the monopoly that Maple would create. I would let it been known I prefer the Maple bid for a variety of reasons compared to LSE, most of them are patriotic reasons. But the regulators who have the final say on this deal need to break up the ownership structure that Maple creates with only a few hands allowed in the cookie jar. I am not a trained economist but a lawyer, so I have my own particular view that is directed towards accountability more so then profitability. I believe capital markets are more about trust then high finance. I believe strongly in principled regulation of the stock market which necessitates a division between investors, their advisors and the owners of the regulated clearing houses which are the engine of our economic prosperity. We only have to look south to the credit crisis of 2008 to see how important an issue this is for our economic future. For these reasons, I hope the Competition Bureau embraces my view that if the Maple group is going to have effective ownership of the TSX, they need to be broken up.