Mongolia more booby prize than trophy for the LSE

You might have missed this one in the blur of global markets activity, but the LSE announced it was going to help the people of Mongolia to establish their very own bourse in the capital Ulan Bator.

Quite a lot has happened since the London Stock Exchange in February announced a "merger" - the term is in dispute - with the Canadian bourse operator TMX.

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Last Updated: May 11, 2011

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A multibillion-dollar bidding war has broken out between European and US exchanges over control of western financial markets; a general election in Canada has returned the same conservative government that expressed concerns about the London Stock Exchange (LSE)-Canadian plan a few weeks back; and a consortium of Canadian bankers has grouped together to try to block the deal.

Oh, and the LSE has done a deal with the Mongolian Stock Exchange.

You might have missed that one in the blur of global markets activity, but the LSE announced it was going to help the people of Mongolia to establish their very own bourse in the capital Ulan Bator. Now, Mongolia is a fascinating place and - thanks to soaring global commodity prices - will be able to boast high rates of economic growth for some time to come.

But for an organisation such as the LSE, which likes to claim it is the leading financial marketplace in the European time zone, to be even bothering about Ulan Bator while the future of global exchanges is being decided in Frankfurt and New York is indicative of how the LSE's world view has diminished.

It also recently signed deals with stock exchanges in India and Malaysia, but, interesting as these places certainly are, they are not going to be the locations for the next major global financial market. And nor is London, judging by the way things are going.

The LSE's ambitions are not the only thing that has diminished since the Canadian plan was announced. Its shares have also taken a hammering. From about £930 in February, they had fallen 11 per cent to stand at £826 at the time of writing.

UAE and Gulf investors are keeping a close eye on these events. Borse Dubai, the regional exchange operator, has a 20 per cent stake in the LSE, and must have been pleased when those shares put on some US$25 million (Dh91.8m) in value the day the Canadian deal was announced. Since then, the trend has all been the opposite way.

The big loss Dubai was already sitting on since its LSE investment was made in 2007 has become bigger almost by the day. Qatar, with a stake of 15 per cent acquired at the same time as Dubai, must also be worried.

Whether the LSE, under the relatively new chief executive Xavier Rolet, is bothered about the concerns of Gulf investors is uncertain.

We do know, however, that when the Canadian deal was first announced there was some consternation, at least in Dubai. The emirate had been given only the most perfunctory advance notice of the intended link-up, and some were not impressed with what they heard.

It was not just that Dubai had not been persuaded of the great strategic or value-enhancing benefits of the Canadian deal; it would also have diluted their stake in the enlarged company, and entailed all sorts of regulatory hassle in Canada, too.

Some of the latter seems to have receded. A preliminary report by Ontario politicians gave the deal approval, with strings attached. What some Canadians regard as the "takeover" of TMX by London did not become an issue in the country's recent election. And Dwight Duncan, the finance minister who first voiced concerns about Dubai's presence on the LSE share register, has gone quiet.

But there are still big hurdles to overcome if the LSE-TMX deal is to go ahead. Last week, it emerged that a consortium of Canadian banks had been in contact with investors with a view to mounting their own bid for TMX.

They would have had to raise some $3 billion, but Canada, one of the few western countries to come out of the financial crisis relatively unscathed, should be able to do that.

Meanwhile, the real battle is going on between the US and Germany, with the domination of western financial markets the prize. Nasdaq OMX and IntercontinentalExchange are trying to scupper Deutsche Borse's agreed $10bn deal with NYSE Euronext.

Dubai has a stake in that one too, because Nasdaq is its partner in the Nasdaq Dubai exchange.

The signs are not good that London will emerge from all this with a strengthened strategic position, or very happy shareholders. Still, the LSE will always have Ulan Bator.