Technology Bolsters Nasdaq's LSE Bids

NEW YORK—The Nasdaq Stock Market's technology arsenal coupled with new independence has emboldened Nasdaq in the game of one-upmanship that has emerged between Nasdaq and the New York Stock Exchange (NYSE) over the London Stock Exchange (LSE).

None other than Richard Greifeld, president and CEO of Nasdaq, was extolling the virtues of Nasdaq's technology assets on the eve of Nasdaq upping its LSE ownership stake from 15 to 19 percent. This past Wednesday, Nasdaq bought an additional 9.7 million shares in the LSE at £12.18 ($22.54) per share. Last month, Nasdaq acquired 13.8 percent of the LSE from Threadneedle Asset Management and 1.1 percent from Scottish Widows Investment Partnership (SWIP) (DWT, April 17).

Speaking at a conference in New York before the purchase became public, Greifeld stressed that Nasdaq was able to pursue its initial 15 percent stake in the LSE because it had reached a level of maturity via technology advances and market independence that made the prospect of international acquisitions more realistic. "These accomplishments gave us the opportunity to look afar,"Greifeld says.

A key jewel in its technology crown is the Inet ECN, split off from Instinet and now part of Nasdaq. The integration of Inet with Nasdaq's other transaction platforms is ahead of schedule with a single platform soon to follow, says Greifeld, who appeared at the Security Traders Association's annual meeting on April 28. In addition to Inet, the consolidated platform, slated to launch in July, will incorporate the Nasdaq Market Center and the Brut Facility (DWT, Jan. 23).

Market independence came with the U.S. Securities and Exchange Com mission's (SEC) approval of Nasdaq's bid to become a full-fledged, registered national securities exchange, Greifeld says. That move is paving the way for Nasdaq to formally separate from the National Association of Securities Dealers (NASD), which because of its ownership and regulation of the market presented a conflict of interest that will become moot (DWT, Jan. 23).

In addition, the LSE and Nasdaq have the same, four lines of business: transactions; data; listings; and financial procedures. "Function has to follow form," Greifeld says. "Once you strip away the complexities of the pond and the different regulatory systems," there is a technology synergy, he says.

In terms of future acquisitions, Greifeld says Nasdaq will not consider anything that will not leverage the core ideal of the exchange. "We're not interested in building a portfolio of acquisitions" that do not have structures similar to Nasdaq, he says.

A Nasdaq spokesperson acknowledges that with the latest purchase, Nasdaq becomes "the largest shareholder of the LSE"—a move that industry observers say is shrewd.

The 19 percent stake demonstrates that Nasdaq is far ahead of the NYSE in the race to expand beyond the U.S. markets, says Harrell Smith, an analyst with Celent. "Were the NYSE to try to jump into the game, it would have to move aggressively to secure a large percentage of LSE stock, for which it would likely have to pay a steep premium."

In addition, the Nasdaq and the LSE have more in common, Smith says. "The NYSE is still grappling with a number of complex initiatives, such as the rollout of the Hybrid trading system and the integration of the Arca platform," he says.

"Nasdaq did a very smart thing,"says Sang Lee, an analyst with Aite Group. "Nasdaq has made it very tough for the NYSE to make the next move." Lee says that he would not be surprised if the NYSE still pursues the LSE, but adds that Nasdaq is a better fit for the LSE, primarily because of Nasdaq's technology platform.

However, another analyst with Celent, David Easthope, cautions that it may be a while before the LSE and Nasdaq tie the knot. "I don't believe there will be a formal merger between Nasdaq and the LSE for years," Easthope says. Moreover, Easthope says that he wonders why everyone is so willing to sell their stocks to Nasdaq. "It could be a sign that the LSE is overvalued," he says.

This latest buy-out has caused Euronext to bow out. The pan-European exchange announced last week that it would not bid for the LSE. "Euronext confirms that it is no longer in discussions with LSE regarding a possible offer for the company," say Euronext officials in a prepared statement.

Euronext now seems to be focusing its attention on a tie-up with Deutsche Börse or the NYSE. "An agenda item proposed by a shareholder is asking for a vote on the principle that a merger between Deutsche Börse and Euronext is in the best interests of all the shareholders of Euronext," according to a Euronext statement.

However, the exchange operator is still considering other options. "Active discussions with Deutsche Börse and other parties are therefore continuing, with a view to identifying the most attractive and value-creating transaction available," according to the Euronext statement.

Euronext officials decline further comment, pointing to a formal announcement to come at its general meeting on May 23.

NYSE officials did not return calls for comment about Nasdaq's latest move.

In the meantime, the markets will keep an eye on Nasdaq's next move. Under U.K. regulations, Nasdaq has to wait at least seven days before buying more shares in the LSE. Afterwards, the U.S. exchange can raise its stake to 30 percent over the six months following its withdrawal from its last overture, which expired March 30—unless a rival bid is launched.