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Stock exchange merger wave claims Big Board

(MoneyWatch) IntercontinentalExchange (ICE), a major force in commodities trading, is buying stock market icon New York Stock Exchange (NYX) for $8.2 billion in stock and cash.

It's the end of an era, as NYSE Euronext -- the full name since a 2006 merger with a European stock exchange -- had originally formed in 1817 and become the marquee stock exchange in the world. The deal also marks a continuation of the wave of consolidation reshaping the global financial markets, as the industry's established but lumbering giants seek to preserve their market share amid growing competition from electronic trading platforms.

Indeed, with old-guard stock exchanges finding it increasingly hard to remain competitive, ICE's acquisition of the Big Board puts pressure on other U.S.-based exchanges, such as the Nasdaq (NDAQ), to find their own merger partners.

That NYSE would be acquired was almost a foregone conclusion because of the pressure on exchanges to expand their business and diversify their offerings. Situations like the meltdown at MF Global show how easily trading brokers and exchanges can cause widespread damage to financial markets.

European exchange Deutsche Boerse (DBOEF) bid for NYSE more than a year ago. Both ICE and Nasdaq objected and then made a hostile takeover attempt. Regulators nixed the attempt, largely because Nasdaq and NYSE have been direct competitors.

Such antitrust concerns should not come into play in uniting ICE and NYSE. Howard Tai, senior analyst with management consulting group Aite Group, notes that the two exchanges have complementary businesses, with little competitive overlap. ICE concentrates on commodities, trading while NYSE is specializes in corporate securities. Regulators are likely to be far more receptive to the combination.

Despite the historic tie-up between ICE and NYSE, such companies are in fact scrambling to keep up with consolidation overseas, particularly in Asia. "The Hong Kong exchange, which is known as a securities exchange, bought the London Metal Exchange, [and] Russia's primary commodity and currency exchange married the stock exchange," Tai notes.

Other major exchange transactions in recent years include the NYSE's $10.2 billion acquisition of Dutch exchange Euronext; Nasdaq's $4 billion purchase of Nordic market operator OMX in 2008; and Chicago-based CME Group's $7.5 billion deal that year for New York's NYMEX.

The global financial meltdown in 2008, which drastically reduced trading volumes in the U.S. and Europe, is another factor that makes such deals "inevitable," he adds. Exchanges need greater financial strength to withstand downturns. Meanwhile, regulators favor centralized electronic trading so activities are transparent to all investors rather than a handful of insiders.

The ICE-NYSE deal puts Nasdaq squarely in the spotlight. The combined entity will have much greater financial resources, which could give its NYSE securities trading arm an advantage in battling with Nasdaq to attract companies that want to list themselves on the exchanges. The total market capitalization of ICE and NYSE Euronext is currently about $17 billion.

Nasdaq, which has a $4.3 billion market cap, will have to find a commodities exchange for its own deal, Tai said. The most obvious partner would be the Chicago Mercantile Exchange (CME), which sports a $17 billion market capitalization.

Image courtesy of Flickr user brian glanz