Is the NYSE-Deutsche Boerse Merger a Win for Traders and Investors?
It’s big news for the investment industry. It has also sparked patriotic talk on both sides of the Atlantic about the naming of the combined company. It will certainly bring a close look by regulators. Not to mention the hubbub about what will happen to the infamous New York Stock Exchange trading floor.
For individual investors, it’s an interesting event, but not an actionable one. Trades executed by individual investors for buying or selling NYSE-listed stocks are currently routed to computers, not humans. Should the merger be completed, your trades will still be routed to computers.
Over the longer term, it is possible that individual investors could see more and cheaper access to European markets. But even if that were to happen, there is still the question of whether you should trade European companies that are not listed in the United States. I’m not talking about large, multinational companies, but rather those whose business primarily centers on Europe. For instance, what is the equivalent of Kohl’s (NYSE:KSS) in Germany? (I’m not ashamed to admit that I have no idea.)
Keep in mind, however, that this merger is less about stocks and more about derivatives. The merger will provide greater access to the European derivatives markets. This is why the CME Group (NASDAQ:CME) is being watched for a potential counter-offer. As I write this, the Chicago-based company has been mum on the subject. I will not speculate on what the CME Group will or will not do.
Derivatives are an area of growth for the exchanges. Plus, regulators believe that having interest rate swaps and other such vehicles traded on exchanges will result in more transparency and, they hope, fewer financial debacles. The Dodd-Frank financial reform bill, signed into law last year, calls for derivatives to be traded on public markets. There is a lot of pushback, however, and House Republicans are trying to prevent many provisions of the new law from being funded.
For individual investors, derivatives mostly fall into the “just because you can trade them, doesn’t mean you should” category. They are complex investments that carry counterparty risk–the possibility that the party on the other side of the trade will fail to fulfill their obligation. Derivatives are best used to hedge, not to invest.
Each merger is its own animal, and it will be a while before we know whether the NYSE Euronext-Deutsche Boerse merger will be completed. In addition, any large change in the financial industry has the potential for unintended consequences. On the other hand, the economy and corporations are becoming increasingly global, so it’s not surprising to see the exchanges try to expand across oceans.
Investing in Europe
If you want to invest overseas, a mutual fund or exchange-traded fund (ASSET CLASS: EQUITY :ETF) will get you instant exposure to a variety of companies. Vanguard operates the biggest European funds with its European Stock Index mutual fund VEURX and its European ETF (NYSE:VGK).
The alternative is to pick individual securities. Many European companies list American depositary shares ADSs, also referred to as American depositary receipts ADRs, on U.S. exchanges. (An ADR is the physical certificate, while ADS refers to the actual share.)
The advantages of focusing on ADRs instead of trying to trade on a foreign exchange include lower commissions (they are the same as what you would pay for U.S. stock) and the ability to screen for companies with specific characteristics.
Charles Rotblut, CFA, is a Vice President with the American Association of Individual Investors. His new book is Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio.
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