LSE and Deutsche merger: Size is not the only thing that matters!

Look, this was bound to happen. Whether it involved LSE and Deutsche, like in this case, or any other exchange (e.g. OMX, BME, etc). The problem apparently was that Asian and US exchange groups were dwarfing European exchanges. So, if the merger goes through, we'll have a European exchange group that can compete with CME, ICE and HKEX. However, is size really our first priority? I don’t believe it should.

As far as the members of these exchange are concerned, other topics are more important than the potential size of an exchange. Just to name a few: Mifid II, rising costs, clearing, technology, execution quality, access... These are the topics that the LSE-Deutsche combination will need to address before we can say that the deal has been good for members and the broader trading community and not just for the shareholders.

The merger provides a lot of opportunities to change the market structure in Europe. Let’s suppose that both LCH Clearnet and Eurex remain in the group in one way or the other. It would not be unreasonable to assume that these CCP's will become inter-operable and this could be a catalyst for other CCP's to finally start working on pan-European inter-operability. That would be a real money saver on top of serious reductions of outstanding risk for various trading firms. General Clearing Members might be less happy with this but that’s a different story.

I don't believe that we will see one big market for both exchanges soon. There's no real direct reason to do so. However, access to markets can be simplified by facilitating connectivity (trading and data) to both exchanges from a single data center, either in London or Frankfurt. Again, a real money saver for a lot of firms looking for access and not speed.

When it comes to consolidating business lines, I do see major opportunities when it comes to ETF's. The European markets are fragmented and the combined order books of both exchanges will make the others look obsolete. National interests probably play a less important role so this is a space to watch.

Finally, the combination finally provides the much desired derivatives platform for the LSE.

So, the potential is great. Time will tell what they do with it. If things pan out then there could be real benefit for all. Let’s see in the next few weeks, months, years,…