American And British Cousins Buddy Up

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What's going on?

Nex Group, a British financial exchange that focuses on the trading of currencies and government bonds, agreed late last week to sell itself to US exchange operator CME Group for $5.5 billion creating a major international player in the space.

What does this mean?

Nex matches buyers and sellers of bonds and currencies, acting as an electronic broker for the transactions. Meanwhile, CME Group is one of the worlds biggest exchange groups and owner of the main trading pits in the US (like the Chicago Mercantile Exchange) for currencies and government bonds. The idea is to combine the two companies, which already do the same thing, into a bigger, cross-Atlantic firm that should, with its larger size, be able to lower costs and increase profits.

Why should I care?

For markets: This deal aint over yet

CME Group has agreed to pay a significant premium for Nexs shares (almost double the price at which they were trading before news of the sale leaked in the media!). However, the deal involves paying roughly half of the total in cash and the other half in shares, which means Nexs shareholders will own some CME Group shares. This leaves the deal vulnerable to a competing offer from rival exchanges as Nexs investors may prefer a sale that pays them entirely in cash.


The bigger picture: Like many industries, exchanges are looking to group together.

Exchanges generally have a set of fixed costs, like building and maintaining the technology that powers their trading systems. But, once those fixed costs are covered, they can process an almost infinite number of transactions at little additional cost. By pairing up, the newly combined CME Groups fixed costs can be mitigated while the number of transactions it processes should rise considerably which means that the combined entitys profit per transaction should also rise. More than most industries, financial exchanges are scale businesses which also helps explain the logic behind the recently scuppered merger between the London Stock Exchange and Germanys Deutsche Brse.

Originally posted as part of the Finimize daily email.

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