As the New York Stock Exchange makes solid progress toward a friendly takeover of the pan-European exchange, Euronext (ENXT Paris Exchange), NDAQ may be worried about being left behind in the development of pan-global exchanges.
One downside of a US parent of non-US exchanges is the chance the US securities regulators would impose the more in depth disclosure and reporting requirements of the US markets. It might be that a non-US parent of both US and non-US exchanges could operate the exchanges separately without exporting US regulations abroad. However, it would seem to us that the real advantage of pan-global exchanges is a single platform for stocks globally. That would not likely be achieved by operating exchanges separately.
According to MSCI, the US stock market represents only 43% of world market capitalization, and Canada represents 3%. US investors can conveniently trade stock in both the US and Canada and do so at the lower brokerage commissions we have become used to paying.
Except for ADRs, US investors are shut out of the 46% of direct share purchases in the remaining world market represented by developed countries (MSCI EAFE - Europe, Australia and the Far East).
The brokerage complexities getting to those markets results in commissions and fees that can be 10 to 30 times what US investors pay for US stocks. A US exchange owning a major European exchange would likely sooner or later open most of that other 46% of the world market to US customers for direct investment at low commission rates. That would change US portfolios a great deal, we would think.
Instead of buying major baskets of non-US stocks such as the MSCI EAFE ETF (EFA), or some of the other country funds such as Spain (EWP), Austria (EWO), Germany (EWG), France (EWQ), UK (EWU), The Netherlands (EWN), or Switzerland (EWL), investors would be able to select issues of interest to them without also buying all the other stocks that may not want to own. Those country fund ETFs have low liquidity compared to the liquidity of the major stocks in their portfolios. Liquidity is a key factor for investors. The bigger the investor's portfolio, the bigger the bite-size they must buy and the greater the liquidity they require to make an investment.
We see a takeover of Euronext by the New York Stock Exchange (NYX) or of the London Stock Exchange by NASDAQ, as providing the execution costs, liquidity, and possibly corporate information disclosure required to create an entirely new world for investors -- a world where the boundaries between domestic and international investing will be blurred even more than they are today.
One way or the other, sooner or later, we will have access to a unified all electronic global stock exchange. Along the way, there will be some handsome profits made by investors in the acquired exchanges, and international investing will undergo the same kind of economic and pricing revolution that we have already seen in world trade of manufactured goods. The cost of global investing will plummet.
Disclosure: We have current positions in EFA, EWO, and EWP