Musical chairs for stock exchanges

Hands up who wants to run a stock exchange? News that the London Stock Exchange (LSE:LSE) and the TMX Group (TSE:X) have abandoned their tie-up due to a lack of shareholder support brings the number of failed mergers in this sector to a total of four over the past year. That said, the merger of NYSE Euronext (NYSE:NYX) and the Deutsche Boerse (ETR:DB1) seems to be sailing through. In an impossibly challenging sector we will look to see if long or short investors are taking any strong views, or whether they are merely sitting this one out.

Shareholders in the LSE have been in a win win situation. Should the merger have taken place, they would have ended up holding shares in a bigger company, better able to compete in the global markets. The fact that this marriage has not been consummated has benefited them, but in a more short term sense. The LSE is now saved from spending any money on the merger. Plus, and more significantly, our data shows investors have been buying shares in the LSE in recent weeks, perhaps in the belief that it will become a takeover target.

Long only investors who lend have been edging their holdings higher over the last six months from 26 million shares to between 29 and 32 million shares. Let’s try and clear up the short selling picture in the LSE. We believe that data from Crest/Euroclear has long since contained equity repo activity that should not be confused with short selling. This explains why their number on loan was over 20% of all shares, whereas the Data Explorers stock borrow flow information was far less. We currently see only 3.3% of all shares on loan. We also notice that these “financing” trades have come off in the Crest numbers to only 5.5%. A reduction from 27% to 5.5% in one day proves that this must have been equity repo rather than shorting.

Short interest was higher in TMX group at 6% but had not deviated much over the last 3 months. The shares rose yesterday too, perhaps in anticipation that the Maple consortium bid will sail through?

However, in this game of bidding musical chairs, surely one or two exchanges will be left out and therefore set to face a slow decline in profitability as they become squeezed out by the newly enlarged global competitors. Short sellers seem to think that the Spanish stock exchange – Bolsas Y Mercados - is a candidate for this fate with 5.5% of all shares being borrowed, which represents most of the supply you can short.

In general, the big long only investors have been walking away over the past month. As we can see from the table, the percentage change in the number of shares held in these exchanges by funds who lend is down. There is a small increase for CME Group, which could signal that investors are more interested in their commodities exposure.