Stock exchanges are back in the news with the announcement of a planned merger between the London Stock Exchange and Canada’s TMX group. This comes soon after news of the merger of the Singapore and Australian exchanges. Short sellers have been active in this sector so it is worth analyzing their current behavior. In summary, we see a general picture of reduced short selling. Is this because these firms have been rising with the tide in the ongoing equity rally or due to a change in their fortunes? We will look at LSE (LSE:LSE), TMX (TSE:X), Hong Kong Exchanges & Clearing (HKG:0388), NASDAQ (NASDAQ:NDAQ), Deutsche Boerse (ETR:DB1), Singapore Exchange (STI:S68), NYSE Euronext (NYSE:NYX) and ASX (ASX:ASX).
Having fended off takeover attempts by Deutsche Boerse and NASDAQ, the LSE is now in talks with a small Canadian exchange whose combined entity would only be the 7th biggest player by market value. Will this be the first of many small deals that will combine to create value? Or is it a reflection of the fact that the big exchange players are not “in play” and that the LSE is struggling to grow profits as it currently stands? Short selling is not very high in the LSE at fewer than 4% of all shares but has been rising since November. With the LSE’s share price rising from GBP 6 to GBP 9 in the last 8 months it is hardly surprising that the demand to borrow is so low.
TMX Group (TSE:X) shows more noteworthy short interest at 6.5% of shares despite a similar recent rise in their share price. It was as high as 7.8% in November last year. If the merger with the LSE is successful they will form 44% of the group and be the public share exchange for a very large proportion of the world’s mining companies.
Whether or not the recent strong share price performance from many stock exchanges is to do with a rising market or in anticipation of takeovers is a moot point. What is more certain is that the shares might well be going sideways or falling without this backdrop given the headwinds facing their businesses. Along with volume being low at present we all see fragmentation of venue when it comes to trading. For instance, one of the “dark pools” where people can trade away from places like the LSE had a record day in early February (of Instinet’s total European flow on 2 February, 42% was traded at the mid-price on dark liquidity pools, 39% was traded on the primary markets and 19% was traded on the lit MTFs.)
Demand to borrow the bigger players has recently fallen, NYSE Euronext (NYSE:NYX) (under 2%) and Deutsche Boerse (ETR:DB1) (1.6%). NASDAQ OMX (NADSAQ:NDAQ) shows recent short covering from 4% of all shares to 3%. This is despite the fragmentation of places that investors choose to place their orders and the impending regulation surrounding flash trading, the impact of dark pools, and the challenges brought about in being both for profit public companies as well as public servants in maintaining price efficiency and stability.
Further consolidation could be set to occur in Asia on top of the Singapore Exchange’s (STI:S68) agreed takeover of the ASX (ASX:ASX) of Australia. 5% of S68 is on loan while it is 2% for the ASX. This is because electronic trading in this region lags behind Japan and the distances between each financial center as so large as to make connectivity rather expensive. Hong Kong Exchanges and Clearing (HKG:0338) did show some reasonable short selling last year but is now low at 1.5%.
