Spread bet the battle of the exchanges

published 18 May 2011

"Would Britain's regulators step in to protect the London Stock Exchange from a foreign predator?" asks the Telegraph's Ben Harrington. The very fact the question is being asked at all tells you it's pretty frenzied once again in the stock exchange mergers & acquisitions (M&A) market. And a spread better can turn this to their advantage.

The current list of actual, possible and rumoured deals in the global exchanges space is dizzying. For example, last October the Singapore exchange (SGX) bid for its Australian counterpart (ASX). Then, this February the London Stock Exchange pitched in with a bid for the Canadian TMX Group which operates the Toronto exchange. Meanwhile Deutsche Borse climbed into bed with the NYSE Euronext exchange. The list goes on.

Now various Canadian financial firms are clubbing together to save the Toronto exchange from the LSE's clutches and there are even suggestions of a reverse counter bid being tabled. So why all the activity?

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In short, big is beautiful in exchange world. International clients want to be able to do deals at a one-stop-shop as cheaply as possible. So a kind of eat, or be eaten' mindset has taken hold amongst the world's biggest exchanges if you are not a predator you will simply become a target' is roughly the thinking.

For a spread better there are opportunities here. One is often called M&A arbitrage'. In short, you buy shares in a likely target and sell them in a predator ideally as early as possible. Typically a target exchange will receive a boost from a bid (the logic is the predator will overpay) and the predator will suffer a share price dip once a deal is announced.

You can also play the opposite a deal being called off either thanks to regulators intervening to block it or a predator getting cold feet.

Either way, don't forget about stop losses and make sure you keep a close eye on the news this is one arena where things are changing pretty fast just now.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.