Fragmentation: Endgame?

Back in 1994, Coopers and Lybrand (as was) predicted that the number of exchanges in Europe would shrink down to 8 before the end of the decade.  As a modern maths teacher might say – they get marks for the correct approach, even if the actual answer was wrong.  That was the year after the Investment Services Directive was issued in the EU, in the hope of creating single and more competitive market for investment services. 

In the meantime, exchange mergers and acquisitions began and continued for the next dozen years.  Gradually the focal points for the future European exchange space began to appear, but there was still no clearly dominant exchange in mainland Europe.  But the EU Financial Services Action Plan brought the US “elephants” into the room, with Nasdaq and NYSE moving in to Europe to control much of the region’s exchange environment just in time to take advantage of MiFID. 

I’m not a scientist, but I have heard about mass and gravity and black holes, and about how things get sucked into those black holes as a result.  It’s now looking like one exchange operator may dominate mainland Europe and one may dominate northern Europe.  One question is, will the remaining planets stay in their current positions with two large centres of gravity already in place nearby? 

Is this a solution for all market participants’ issues about market fragmentation, lack of transparency, lack of standardisation, cost of infrastructure, etc?  With securities trading, derivatives trading, market data, clearing, settlement and technology all under just one roof, will we get everything that we’ve wished for in terms of critical mass, economies of scale, increased efficiency and reduced costs? 

An old saying, probably from someone very wise and oriental, starts “Beware of what you wish for...”