Analysis By Toby Poston Business reporter, BBC News

The world's big exchanges are looking at merger opportunities

For months market watchers have been predicting consolidation between the world's main stock exchanges.

There have been informal and official talks, rejected bids and stealthy share purchases involving the five exchanges considered the most likely protagonists.

The New York Stock Exchange and Nasdaq in the US and Europe's London Stock Exchange (LSE), Deutsche Boerse and Euronext have all been playing a kind of musical chairs.

And now the music has stopped.

The news that the New York Stock Exchange and Euronext are set to combine operations has been met with approval by most investors and market watchers.

According to the US exchange, a merged NYSE Euronext business would be able to deliver 290m euros ($374m; �199m) worth of technology cost savings and other synergies.

It would also offer near 24-hour trading and provide an outlet for firms wanting to avoid America's Sarbanes-Oxley Act, the stringent corporate governance rules brought in after a string of high-profile business scandals exemplified by the huge fraud at collapsed energy giant Enron.

Out in the cold

Now eyes are being turned to the three remaining exchanges.

With many analysts predicting one further transatlantic merger, it looks like either the LSE or Deutsche Boerse could be left out in the cold.

So what is the likely outcome, and would it be so disastrous if either of the two exchanges didn't find a partner?

A lot of merger deals are done for the wrong reasons David Lascelles, Centre for the Study of Financial Innovation See Euronext's shares See the LSE's shares See Deutsche Boerse's shares See Nasdaq's shares

A deal involving the LSE seems more imminent.

With its 25.1% stake in the company, the Nasdaq is well-poised to tie up a deal, although it has to wait until the end of September to make a full bid after withdrawing an earlier offer, made in March.

But is Clara Furse. the LSE's chief executive, interested?

"We don't need to do a deal - we're not interested in doing a deal for the sake of doing a deal," she said when announcing LSE's annual results last week.

Derivatives dilemma

The LSE reported a 42% rise in operating profit in the year to 31 March.

"From a financial perspective, the LSE doesn't feel it needs to do anything," says Justin Bates, an analyst with Numis Securities.

"But you have to ask if there is now a greater strategic reason to do something following the NYSE Euronext deal."

Critics are now pointing to the LSE's lack of a derivatives trading platform, which would give it access to the lucrative futures and options market.

A number of big names have targeted the LSE recently

It is now nearly five years since the LSE lost out to Euronext in the battle to buy Liffe, the London futures and options exchange, and it has yet to fill this gap in its portfolio.

On Friday, the LSE announced a major bond issue, but the money raised will be used to refinance some of the debts incurred in fending off recent takeover approaches.

'Lame duck'?

So with Clara Furse appearing reluctant, or unable, to grow the LSE through acquisitions the exchange must rely on organic growth to boost revenues.

This may be tougher to achieve given that the recent rise in share prices appears to have run out of steam.

"The LSE has done very well as trading volumes have risen during the bull market of the past few years, but what happens when it ends and we see volumes drop off ?" asks Tony Craze of Dawntraders.co.uk.

He says the exchange is "sitting like a lame duck" waiting to be acquired - probably by the Nasdaq, but maybe by a surprise bid from the Deutsche Boerse.

However, others suggest that almost any merger deal would probably be a waste of money and resources.

"The LSE is somewhat sidelined by the NYSE Euronext deal, but that doesn't really matter - a lot of merger deals are done for the wrong reasons," says David Lascelles, a co-director at the Centre for the Study of Financial Innovation.

He argues against the value of spending billions of dollars, euros or pounds buying rivals when the whole concept of stock exchanges is a bit of a relic from the past.

"More than a third of the recorded share trades in London don't go through an exchange, they are done internally between banks and other big investors," he says.

Deutsche offer

The introduction of the European Union's new directive on financial instruments has now made it legal for institutions in mainland Europe to do this type of trading, which can only be bad news for Euronext and Deutsche Boerse's trading volumes.

Deutsche Boerse could yet join the NYSE Euronext deal

And what of Deutsche Boerse?

It first mooted joining forces with the LSE back in 2000, and an approach in December 2004 ultimately led to the ousting of chief executive Werner Seifert following opposition from a group of hedge funds.

Although it now seems rather sidelined, Euronext's chief executive Jean-Francois Theodore extended a "come and join us" message in a newspaper interview on Friday.

"The structure (of NYSE Euronext) is, of course, open to Frankfurt's stock exchange, which would be welcomed appropriately if it adhered to our federal model," he said.

On the same day, Deutsche Boerse said it would "continue to work towards a combination with Euronext".

Whether that means it would join a combined NYSE Euronext company or look to make its own Euronext deal was not clear.

It is a fluid situation.