The news that Deutsche Borse and NYSE Euronext have today notified their proposed merger to the European merger authorities starts a critical decision-making process for financial markets.

It comes at a point when the approach to competition seems mixed. On the one hand, the proposed combination between ICE and Nasdaq to bid for and break up NYSE Euronext was blocked by the US Department of Justice on the grounds that a merger of Nasdaq and the NYSE would be unacceptable. In the UK the proposed acquisition of Chi-X by BATS has been referred to the Competition Commission for a deeper review.

At least in the US and the UK, the competition authorities seem to be serious about preserving competition among trading venues. However, simply blocking mergers between trading platforms is not enough to ensure that there is real competition. For trading platforms to be able to compete, they need access to the same post-trade infrastructure. This means either using the same clearing house or using clearing houses that interoperate with each other.

Here the picture is more mixed. After years waiting for regulatory approval of the interoperability arrangements (which was finally granted), BATS Europe has announced that it will start a three-way clearing arrangement with LCH.Clearnet, EuroCCP and SIS x-clear for BATS Europe. But at the same time, EMCF, which is the default CCP for BATS Europe, is reported as stating that it no longer supports interoperability and will not be joining these arrangements. And the latest version of EMIR limits its requirements on market access to OTC (not exchange-traded) contracts. Interoperability for derivatives is postponed pending a review by ESMA, due by the end of 2014.

The reason the decision on the Deutsche Borse-NYSE Euronext merger is so important is that it simultaneously touches all the most important issues in European market infrastructure: a merger of the two most important derivative exchanges, a merger of two major equity exchanges and the ownership of a leading clearing house (Eurex Clearing) – one which has so far declined to enter into any interoperability arrangements with other clearing houses.

It is no exaggeration to say that the decision in this case will shape the European financial infrastructure.

As I (eventually) predicted, the LSE finally failed to convince enough of the TMX shareholders to support their bid to “merge” with (i.e. take over) TMX and the deal has now fallen through. In the end this looked fairly inevitable. Informed opinion in Toronto was convinced the deal would not work and stories about the way in which the LSE had treated the Italians after the takeover of the Borsa Milan (my last blog) will not have helped.

Does this mean that the Maple deal will now succeed? Not necessarily. Canadian competition regulators will want to look very carefully at the implications of merging the Alpha Trading alternative trading system with TMX. Ironically one of the most likely outcomes will be the retention of the status quo, with neither the Maple bid nor the LSE bid winning. But the Canadian banks in the Maple consortium will be happy. Their main objective was to block the LSE bid, and in this they have succeeded.

Where does this leave the LSE? Rather exposed, I think. Watch out for further speculation that Nasdaq OMX might revive its interest in the London exchange. The LSE is now in play.

While all the recent headlines about oil and refined products have been regarding OPEC’s inability to agree an increase in production and the IEA’s decision to release 60 million barrels from its strategic reserve, a far more important announcement, with potential long term implications, has received little, if any, attention.

China has announced it will review its retail pricing formula. So why is this so important? Well, global oil demand growth is lead by India, Saudi Arabia and China with their growing economies and subsidised energy prices. That means that their industries and retail consumers are not exposed to the full force of international, free market prices. Since they do not feel any financial pain when prices go up there is no incentive for them to reduce consumption.

At present the Chinese pricing mechanism is designed to adjust the price of gasoline, diesel, and jet-kero if the price of a basket of crudes rises or falls by 4pc over a trading month (20 – 22 days). The proposed change reduces the amount the basket has to rise or fall, by an as yet undisclosed amount, and reduces the period down to 10 days. If China does alter their pricing mechanism to make it more responsive to market forces, and at the same time removes the management of the system away from the politicians and into the hands of the energy companies, we could see a dramatic reduction in demand from the Chinese consumer as they start to feel the effect of high international oil prices. That is as long as it does not lead to social unrest!

My last blog suggested that the best outcome for LIFFE would be a tie up with ICE. At which point ICE and Nasdaq OMX withdrew their bid. In the latest demonstration of my powers of prediction I circulated a presentation last week in which I concluded that the LSE bid for TMX in Canada had a 60/40 chance of succeeding. The latest gossip from Toronto suggests that these proportions should perhaps be reversed. more >>

With crude prices at over $115 per barrel and gasoline in the US at near record levels, it is hardly surprising that yet again the International Energy Agency (IEA) is calling on OPEC to increase production and that US Senators are asking the US antitrust regulator to investigate. What these people seem to forget, or perhaps do not appreciate, is that crude is not homogeneous and that a refiner cannot use all grades of crudes and produce more than just gasoline. The international crude markets have lost approximately 1.4 million barrel per day (b/d) of light sweet crude due to the fighting in Libya. Whilst Saudi Arabia has replaced this lost production on a volume basis, this extra crude has twice and in some cases three times the sulphur content than that of the lost Libyan production. Refineries, especially less complex ones in Europe, cannot handle this extra sulphur and therefore have the choice of chasing reduced light sweet production, and therefore pushing up the price, or reducing throughputs. Should refineries choose to run heavier types of crude they can actually produce less gasoline, but more of the heavier, less valuable, products. Product where there is no increase in demand reducing their margins, if not turning them negative. Even with some sour crudes trading at their largest discounts to the Brent benchmark for two and half years the economics do not stack up for some refiners. European refinery throughputs are down nearly 500,000 b/d compared with last year. And let’s not forget that most of the US gasoline problem is of their own making, they have as many as 50 different grades of gasoline throughout the year – winter/summer and from state to state, the tax on gasoline is extremely low, so there is no incentive for efficient use and to reduce consumption and no new refinery has been built in the US for something like 30 years. The only surprise is, not that we have high prices, but that politicians continue to make demands that have no basis in fact – or is it!