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Capital Markets

Exchanges: Nasdaq’s bid may cut costs, but not for LSE users

The London Stock Exchange’s shareholders clearly have a lot to gain from Nasdaq’s bid for the market, especially if, as is widely expected, the New York Stock Exchange joins in the fray and pushes up the price even further. But what, if anything, users stand to gain is far from clear.

Nasdaq’s 950p-per-share bid is almost twice the 580p per share that Australian bank Macquarie was willing to pay. The price, analysts say, can be justified by the large cost savings that Nasdaq could extract from technology synergies and staff cuts. The potential for cost savings is so great that analysts estimate that Nasdaq could afford to pay as much as 1,200p to 1,650p a share for the London exchange and still have an earnings-accretive deal.

The NYSE, it is thought, could make similarly massive savings.

Even if such savings could be realized, market users would be unlikely to see much of it filtering down to them as lower trading costs.

This is because a transatlantic exchange merger would do nothing to increase competition in the trading of LSE-listed securities. A combined Nasdaq-LSE or NYSE-LSE exchange company would have no more incentive to lower trading costs in London than the LSE does at present.

Any serious potential for reducing trading costs for users, through, for example, a common clearing and settlement arrangement, is impossible in any transatlantic deal because neither the LSE nor any of its New York suitors owns a clearing house and because London’s stocks are priced in pounds whereas Nasdaq’s and the NYSE’s are priced in US dollars.

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