Contributed by Celent Analysts David Easthope and Cubillas Ding

Nasdaq's pursuit of the LSE has received tremendous market and press coverage of late. However, the potential tie-up seemed to turn a strategic corner recently. The revelation, detailed below, that Nasdaq met with the Project Turquoise consortium a few weeks ago to potentially license the INET technology from its ECN platform takes Nasdaq's hostile pursuit of the London Stock Exchange (LSE) to another level. Whereas in the past the Nasdaq/LSE disagreement seemed to be over a fair price for the LSE franchise, Nasdaq has now raised the stakes by making the key issue the future competitive position of the LSE across the whole of Europe.

Of course, taking Nasdaq's offer is not a must for the LSE. Walking away from Nasdaq by no means precludes the LSE from establishing relationships or new ventures in the European continent, or even being acquired by another exchange at a higher price. However, the LSE must now consider the possibility of having to compete with Nasdaq's own technology platform in Europe instead of partnering with it. In a sense, Nasdaq has moved from trying to woo the LSE with a financial windfall to coercing, nay even threatening the exchange by revealing that it is considering other routes into the United Kingdom and Europe. In a sense, Nasdaq has revealed its Plan B to the LSE and other market participants.

Nasdaq's Options

Over the past several days, Nasdaq has outlined through its actions and, through press disclosure, an array of options. It has emerged that Nasdaq has considered directly licensing its INET technology (the architecture underpinning its own ECN platform) to Project Turquoise, a consortium of seven investment banks in Europe focusing ultimately on pan-European electronic equities trading, but likely to focus on the United Kingdom initially. In addition, Nasdaq revealed it could align itself with Plus Markets Group, a UK equities marketplace which trades mostly small and madcap stocks in the United Kingdom. Even rumored is the potential involved with Equiduct, which inherited the old Easdaq technology and is the successor to Nasdaq Europe (Nasdaq pulled out in 2003 after entering the market at the turn of the century). Another option for Nasdaq would be establishing a venture from scratch, but we do not consider this move either likely or wise. Whatever its eventual choice, Nasdaq has made it clear that it will consider other avenues besides the LSE to gain entry to Europe.

Opportunity Under MIFID

Moreover, many believe the back and forth discussions between Nasdaq and the LSE only serves to distract both entities from formulating a strategy for taking advantage of the new market rules in Europe under the Markets in Financial Instruments Directive. MiFID is expected to drive the liberalization of the trading environment in Europe to new players besides the exchanges, such as multilateral trading facilities (MTFs); if so, MiFID will create opportunities. Like the US equities markets in the late 1990s, Europe could see market entrants competing with the traditional exchanges. Thus, given the opportunities afforded by MiFID for entrants, we believe Nasdaq's appetite to crack Europe (again) is not likely to diminish. Doing nothing is really not an option for Nasdaq, given that NYSE-Euronext is fast becoming a reality.

Conclusion

The battle for the LSE franchise may be coming to a conclusive milestone for Nasdaq. However, Nasdaq's charge into Europe is by no means over, given the new trading rules and array of options. It appears that it will be up to the LSE, and its board and shareholders, to decide if they wish to be part of this charge.

This piece was contributed by:

David Easthope, CFA
Senior Analyst, Celent (Boston, USA)

Cubillas Ding
Senior Analyst, Celent (London, England)

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