Is the Proposed NYSE-Deutsche Börse Merger All It's Cracked Up to Be?  Yves Smith  naked capitalism

The failure of exchanges, contrary to popular perceptions, is not impossible. We came within three minutes of having the Chicago Merc and likely the NYSE fail in the 1987 crash. The Merc customer was where S&P index futures traded, and a customer failure to pay $400 million meant that the Merc was similarly going to come up $400 million short on a loan it owed to Continental Illinois. The executive responsible for the account said she could not forgive the repayment. It was only by happenstance that the bank's chairman was in early that morning and authorized the credit extension, allowing the Merc to open. Had the Merc collapsed, the odds of a knock-on NYSE failure were high. The New York Stock Exchange was also at risk of not opening, and its chairman John Phelan feared if it did close, it would never open again.

One has to wonder how a merged entity would evolve, and whether the two exchanges would come to operate as a single exchange. If so, that would create all the regulatory and resolution headaches we see now with the TBTF banks: issues of lack of clarity as to which national regulator is responsible for what, with a lot of activities falling between the cracks by design of the banks, and the near-impossibility of resolving them due to the fact that their activities extend across multiple nation-based bankruptcy regimes.

Admittedly, exchanges in recent history have been more tightly regulated than financial firms, but the flip side is that their increased size and cross border operations will give them much greater ability to pressure regulators than before.

The arguments in favor of the merger all stress greater efficiency. But as any systems engineer will tell you, improvements in efficiency too often come at the expense of safety.