To anyone who thinks of a stock exchange in terms of a bustling trading floor, the Nasdaq Stock Market's offer earlier this month to buy the London Stock Exchange might have been surprising. If the whole point of an exchange is to bring buyers and sellers together in one place, how could Nasdaq manage if separated from its other half by an ocean?
Easy -- through wires, fiber-optic cable, satellite links and massive computers. In fact, traditional trading floors are fading away, and the 35-year-old Nasdaq has never had one; it's always been all-electronic. The Nasdaq-LSE offer -- initially declined but likely to be sweetened or beaten by another suitor -- is just the latest step in a long industry-wide evolution that includes consolidation, automation and conversion of privately held exchanges into public ones.
"There's an obvious advantage in centralizing exchanges," says Wharton finance professor Richard J. Herring. Bigger exchanges enjoy economies of scale that reduce trading costs. That attracts more traders and listing companies. And as trading volume increases, it's easier for buyers and sellers to find one another. The improved liquidity helps share prices respond more quickly and accurately to changes in supply and demand.
The Nasdaq-LSE offer follows an unsuccessful bid for the London exchange by OMX, the Swedish Stock Exchange, in 2000. (OMX later bought exchanges in Denmark, Finland, Estonia and Latvia.) In recent years, LSE also rejected bids by Euronext which runs exchanges in Paris, Amsterdam, Brussels and Lisbon, by Deutsche Boerse, which runs the Frankfurt exchange, and by Macquarie Bank of Australia. Now the Nasdaq move has triggered speculation about a variety of possible combinations: The New York Stock Exchange merges with Deutsche Boerse, the NYSE ends up with Euronext or LSE, Euronext buys Deutsche Boerse or LSE....
"Part of the reason this is happening is that there is a drive to have a single market in financial services," says [continue]
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