The financial exchange feeding frenzy

NEW YORK (CNNMoney.com) -- Nasdaq's $61 million bid for the Boston Stock Exchange may have gotten scant attention from financial markets last week, but the deal spoke volumes about this key segment of the industry.

The deal, while small, marks the latest in a string of buyout mergers among exchange operators worldwide that don't appear to be slowing down anytime soon.

Deutsche Boerse, pictured above, is poised to secure a key toehold in the U.S. market if its $2.8 billion bid for the International Securities Exchange, which was annnounced in April, wins regulatory approval.

"We are in a global exchange land grab," said Brad Bailey, senior analyst at Aite Group, a Boston-based financial services consulting firm.

Just this year alone, the pace of deals has been frantic, even amid this summer's credit crisis. In July, the Chicago Mercantile Exchange (Charts) completed its $9.8 billion bid for the Chicago Board of Trade, or CBOT, creating one the world's largest exchange of traded derivatives.

And in late April, Deutsche Boerse made a strategic move by announcing it would acquire the New York-based International Securities Exchange Holdings Inc. (Charts) for $2.8 billion, one of the largest domestic options exchanges in the United States.

For operators like NYSE, whose landmark deal for Euronext late last year kicked off this "urge to merge," more acquisitions just make sense.

While exchanges generate revenue for providing market data and listing shares of a publicly-traded company, their business is primarily driven by trading. Since exchanges collect a tiny fee for each trade an investor carries out, consolidation means higher trading volume, in addition to lower costs.

It also allows firms such as Nasdaq (Charts) or NYSE Euronext (Charts) to offer an even broader set of investment tools to existing or current customers.

"The real game is about being able to offer multiple asset classes - equities, derivatives and options - all in the same place," said Andre Cappon, president of CBM Group, a capital market consulting firm.

Probably the hottest spots for dealmaking among exchanges lately has been in both the United States and Europe.

As a result, the number of potential exchange targets located domestically has narrowed considerably.

Philadelphia Stock Exchange, which, by some estimates, owns roughly 15 percent of the U.S. options market, could be one firm that finds itself in the crosshairs. In April, reports surfaced that it was holding buyout talks with Nasdaq.

Takeover speculation has also swirled around the New York Mercantile Exchange (Charts) which peddles futures in a number of commodities, including gold and oil. And even the Chicago Board Options Exchange has been mentioned as a likely target.

But with the number of U.S. candidates dwindling, experts like Cappon envision more intercontinental financial market mergers.

With China and India's capital markets still maturing, the next big focus for consolidation could be in Latin America.

Such an exchange could include the Brazilian Mercantile & Futures Exchange, or BM&F, considered one of the world's largest futures exchanges.

"It would be a wonderful target for the Chicago Merc (CME Group) or BOVESPA," he said, referring to the Sao Paolo Stock Exchange, considered Latin America's largest stock exchange.

Also ripe for the taking, said Cappon, is Mexico's Bolsa Mexicana de Valores, an equity exchange that could get snapped up by Spain's Bolsas y Mercados Espanoles.

And hungry players are already emerging in the Middle East.

Oil-rich outfits like Borse Dubai, which is in the midst of attempting to secure a joint bid with Nasdaq for the Nordic exchange OMX, and the Qatar Investment Authority are trying to establish themselves as financial hubs for the region.

"These are regions of the world just 3 months ago people weren't talking about," said Daniel Fannon, a research analyst with Jefferies & Co.

"If they can establish a global footprint in a more established market they will have a nice headstart."

Fast forward a few years and what you might see is an environment where the exchange business is centered around an axis of three major players such as NYSEEuronext, Nasdaq and Deutsche Boerse, said Cappon.

"There will be 3 to 4 global coalitions that will provide exchanges across different time zones," said Cappon.

Maybe the biggest near-term obstacle for further consolidation among financial exchanges is the current credit market climate, which is still shaky at best.

So while smaller buyouts like Nasdaq's bid for the Boston Stock Exchange may come off without a hitch, larger deals could get delayed.

"We could see a lull for a bit, but certain exchanges will remains targets," said Aite Group's Bailey.

But experts agree that the biggest hurdle for the exchange buyout craze remains regulatory oversight.

Exchanges looking across borders have to get approval from not one, but two regulatory bodies, and are held to different sets of regulatory standards. Fold politics into the mix, and getting a cross-border deal done could be particularly daunting.

But as difficult as regulators may make it for exchanges looking to gobble up rivals both domestically and overseas, experts like Cappon contend they are only fighting the inevitable.

"Regulators might create a lot of problems but they realize they cannot stop a major trend," he said.