Expected European Merger May Force Nasdaq to Rethink Plans

A merger between the Deutsche Boerse and the London Stock Exchange, which is expected to be announced today, is compelling Nasdaq to rethink its European strategy, market analysts said.

The No. 2 U.S. stock market is expected to have a role in any merger, which would create Europe’s biggest bourse, based in London, though it is expected to stop short of swapping stakes in the near term, sources familiar with the talks said.

Nasdaq will hold a news conference this morning in New York to make a “major” announcement about its efforts to expand into Europe, it said Tuesday. A spokeswoman declined further comment.

Meanwhile, the London Stock Exchange and the Frankfurt, Germany-based Deutsche Boerse said they will hold a joint news conference this morning in London. Industry sources familiar with the matter said the two exchanges will unveil their long-anticipated merger plan.

Nasdaq’s participation in such an arrangement may mesh uneasily with its announcement last year that it was setting up Nasdaq-Europe, a pan-European electronic stock market to be based in London. It was scheduled to open in the fourth quarter of this year.

But the U.S. market known for its dominant role in the tech sector, with such stocks as Microsoft, Cisco Systems and Intel--is seen increasingly looking to partner with traditional exchanges in Europe rather than challenging them.

“What’s happened in Europe is the realization on the part of Nasdaq that it is more competitive there than originally assumed,” said Ian Domowitz, Smeal professor of finance at Pennsylvania State University. “Europeans have already jumped on cross-border trading and building electronic exchanges.”

The National Assn. of Securities Dealers, which governs Nasdaq, had been in talks with the London Stock Exchange and the Deutsche Boerse before the European markets began moving toward a merger proposal, and those talks have continued.

On Tuesday, NASD Chairman Frank Zarb held discussions at the London Stock Exchange, where officials were putting finishing touches on their plan, industry sources said. Zarb declined to comment.

A link with those exchanges would supply Nasdaq with the liquidity it needs to become a legitimate market in European issues, Zarb has said. It also would give American investors another venue to trade shares of European companies, he added.

Nasdaq is expected to press ahead in Europe, regardless of any agreement it might strike with the British and German exchanges, but an alliance would push the project along, said a source close to discussions.

A merger of the London and Frankfurt exchanges would create Europe’s biggest bourse and eclipse newly created Euronext, which groups the Paris, Amsterdam and Brussels stock markets.

For Nasdaq, setting up shop in Europe is part of a larger plan to erect a global, electronic stock market that would eventually trade the world’s most-liquid stocks 24 hours a day, seven days a week.

Nasdaq last week announced that it would build Nasdaq Canada and has previously disclosed plans to build a market in Japan. It also has alliances with the Australian and Hong Kong stock exchanges.