Deutsche Boerse and NYSE Euronext's plan to create the world's largest stock and futures exchange has sent competitors around the world scurrying to find partners, accelerating an industry shake-up.
Traditional exchanges are under intense cost pressure from upstart electronic rivals like Bats Europe, Chi-X Europe and Direct Edge which were set up by the world's largest investment banks to loosen the big bourses' grip on share trading.
"The smaller players have really changed the face of these larger players around the world, and so they're forced to merge," said William Karsh, former chief operating officer at Direct Edge, one of two privately-run U.S. electronic trading operators that have challenged NYSE and Nasdaq OMX.
With key elements of NYSE's deal with Deutsche Boerse to form a marketplace with annual trading volume exceeding $20 trillion yet to be decided, the plan could yet founder on the same rocks which prevented previous merger attempts between the German exchange and Euronext.
"...it will be a long and drawn-out process, given the complexity of two legal systems and the need for several steps of regulatory approval," a source close to the deal said.
Once notified, European Commission competition authorities have 25 days to decide on the case.
"Given the fact that the merger will create the biggest stock exchange in the world, there are lots of regulatory, corporate and competition issues to be solved," said Susanne Rueckert, a partner and specialist in capital markets at German law firm FPS.
"It will be a perfect test whether the national authorities will be prepared to make concessions on the further globalization of the financial markets."
Hong Kong Exchanges and Clearing Ltd was quick to open the door to deals with other players on Thursday following news that Deutsche Boerse and NYSE were in advanced talks.
HKEx, the world's biggest exchange operator by market value, said it would consider international alliances or partnerships that were consistent with its focus on China.
Wednesday's news of a bid by London Stock Exchange for Canada's TMX, followed by the Deutsche Boerse talks with NYSE, revived a wave of international mergers last seen in 2006 and 2007, and shifted the process of exchange consolidation up several gears.
"The race is on to create regional trading gateways to serve international institutional investors, and the drivers are accelerating," Axel Pierron, an analyst at Celent, said.
The proposed mergers fueled a rally in shares of listed exchanges globally. Australia's ASX, which is trying to overcome domestic opposition to a $7.9 billion takeover bid from the Singapore Exchange, rose 4.7 percent.
Aggressive, upstart trading venues have eaten deeply into the market shares of these traditional exchanges, forcing the Big Board, the LSE and others to invest heavily in trading technology and to look to higher-margin areas to grow.
Earlier a financial regulator at the German regional state of Hesse, which must approve any merger agreement involving Deutsche Boerse, said that it would seek to preserve the interests of Frankfurt as a financial center.
"The biggest danger of a failure for the deal at this point is antitrust concerns in the derivatives market, because Eurex and Liffe would have a market share of more than 90 percent in Europe. We consider these concerns as overdone," said Stefan Brugger, a fund manager at Union Investment in Frankfurt.
The combined group's derivatives unit will be headquartered in Frankfurt, while New York will get stock trading, two sources close to deal told Reuters.
SGX's bid for ASX faces major political and regulatory hurdles in Australia, but while many investors said the latest deals appeared to strengthen the case for the tie-up, others said the LSE could now be seen as an alternative partner.
"LSE is clearly making a play on the mining-resources side of things and Asia is in general very resource-hungry, said Niki Beattie, of consultancy Market Structure Partners.
Both the Australian and London stock exchanges have traditionally attracted a significant number of resource company listings, including heavyweights such as BHP Billiton.
The LSE's proposed purchase of the Toronto stock market operator would make it the world's fourth largest and a top center for growth sectors of mining and energy.
Other exchanges in Asia have been reluctant to seek tie ups due to tight ownership and political obstacles.
HKEx shares fell by the most in about three months on worries of greater competition. The Hong Kong exchange has so far avoided any moves because of its grip on China-backed IPOs.
While the number of stock trading platforms is set to shrink, further concentration in markets such as oil, gas, metals or other raw materials could be some way off with countries keen to keep control to ensure security of supply.
"Consolidation is less likely for commodities and energy as governments are more likely to see them as strategically important," Frances Hudson, global strategist at Standard Life, said.