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In the battle among Europe's exchanges to dominate pan-European equities trading and clearing, a soft-spoken former French bureaucrat carries the biggest stick.

In the battle among Europe's exchanges to dominate pan-European equities trading and clearing, a soft-spoken former French bureaucrat carries the biggest stick.

By David Lanchner
June 2002
Institutional Investor Magazine

Jean-François Théodore cannot abide confrontation. How to avoid it? C'est facile. The chief executive of Euronext, Europe's first cross-border securities exchange, simply feigns sleep during contentious staff meetings rather than join the fray. Only after tempers have cooled and voices have dropped will he "wake up" to propose a compromise.

Théodore's noncombative style has served him well in the race for trading supremacy touched off by European monetary union. Even before the single currency arrived in 1999, effectively turning 11 securities markets into one, the Continent had too many exchanges. Now, as consolidation sweeps Europe, the opportunistically drowsy Théodore, who used to be in charge of the second-tier ParisBourse, has trumped his counterparts in London and Frankfurt, forging alliances that could eventually give France's main exchange greater liquidity and market share than the traditional heavyweights.

Théodore's great wake-up call came in 2000, after the London Stock Exchange and Frankfurt's Deutsche Börse signed an agreement to form a cross-border exchange named iX. Joining forces with two other regional exchanges , Amsterdam and Brussels , he stole a march on his bigger rivals. While the iX deal disintegrated amid bickering over matters technical (clearing systems) and political (allocations of shares in the joint company), Euronext emerged as a world-class exchange, combining futures and options with equities trading on Paris's ultraefficient computerized order-matching system.

But Théodore didn't stop there. In his biggest and boldest move, Théodore last October outmaneuvered the London Stock Exchange to acquire the London International Financial Futures and Options Exchange, known as Liffe, for £555 million ($808.7 million) in cash. Today Euronext is in the process of integrating its fifth market, the Portuguese stock and derivatives exchanges collectively known as the Bolsa de Valores de Lisboa e Porto, which joined the group in January.

"It's clear that more than Frankfurt or London, Euronext is driving fundamental changes in European securities trading," says Manus Costello, an exchange company analyst with Merrill Lynch International.

With trading volume in 2001 of E2.27 trillion ($2 trillion), Euronext ranks as Europe's second-largest stock exchange, behind London's E5.08 trillion in annual turnover but far ahead of Frankfurt's E1.61 trillion. In terms of market capitalization, Euronext is a close No. 2, with E2.12 trillion, versus the LSE's E2.39 trillion. Together the Big Three exchanges accounted for 81 percent of all European market cap in the first four months of this year, according to the Brussels-based Federation of European Stock Exchanges.

And more consolidation is on the way. Europe has more than two dozen other exchanges, all of them considerably smaller and less efficient than the Big Three. The patchwork of national exchanges drives up administrative and information technology costs for brokers and thus for member firms and their investors. Fragmentation also means that it's harder to buy and sell stocks than it would be if liquidity were concentrated in one or two exchanges. But the domestic banks and brokerages that are the exchanges' customers , and in many cases their owners , are loath to give up the bourse structures that have guaranteed them lucrative monopolies in the trading of their own domestic securities. Théodore's great accomplishment has been to put in place technology platforms that can streamline trading and lower expenses for users.

True to his nonconfrontational style, Théodore has kept his acquisitions intact, duplicating jobs and barely cutting costs. When he put together the Euronext deal two years ago, Théodore offered his partners generous terms: He allocated 60 percent of the equity to ParisBourse, 32 percent to Amsterdam Exchanges and 8 percent to Brussels Exchanges. According to their relative trading volumes, Amsterdam and Brussels should have gotten only about 22 percent and 3 percent, respectively. Théodore went out of his way to coddle his partners. He kept their managements and much of their staffs in place. He also agreed to let George Möller, who headed the Amsterdam exchange and is now Euronext's chief operating officer, succeed him as CEO in 2004.

Théodore used the same tactic with Liffe. Its chairman, Sir Brian Williamson, and chief executive, Hugh Freedberg, retained their titles and authority after the merger. The LSE, Liffe's other suitor, would have been less liberal: Williamson would have become deputy chairman and Freedberg deputy chief executive.

"Exchanges have a choice," Théodore says. "Either consolidate with someone big who is just trying to take their own business further or go for a friendly deal that offers everyone something. The latter is what we are doing. We are succeeding in federating different exchanges, but we leave each partner their local roots and national identity."

Such "friendly deals" , long on sensitivity but short on cost-efficiency , have given Théodore a major foothold in the world's most globalized financial market and dramatically improved his chances of eventually merging on favorable terms with the London Stock Exchange and other bourses. But they are also an expensive strategic gamble: If Euronext can't control costs and boost profitability, it could itself be vulnerable to overtures by the LSE or another bourse and forced into a deal that leaves it in the unenviable position of junior partner.

And profitability has been a problem. The former ParisBourse had a gross profit margin of 25 percent; at Euronext it's only 13.3 percent. Meanwhile, both London and Frankfurt, which have kept tighter reins on costs, have gross profit margins of about 29 percent.

But Théodore believes that what he has given up in margins he will gain back in growth, as Euronext's pan-European liquidity pool attracts more traders. "If you don't do anything, it is very easy to have a big margin," asserts Théodore. "We are investing. We are laying the foundation of the first pan-European exchange."

So far investors aren't buying that argument. Since Euronext went public last July, its stock has mostly traded below the offering price of E24; it was at E23.88 in mid-May. During the same period, shares of the London and Frankfurt exchanges were up 22 and 25 percent, respectively. "Théodore is great at cutting deals," says Zach Egan, a portfolio manager at Liberty Wanger Asset Management in Chicago. "But his profit margins are well below those of competitors, and that is hurting his stock. There is clearly a concern that top-line growth won't translate into strong profit growth." Egan and his partners took a E20 million position in Euronext , 0.8 percent of its market capitalization , when the company went public last July.

"What's holding back Euronext's margins are staffing costs, and it's an issue they have not adequately addressed," says Merrill's Costello. Théodore won't slash costs in ways that might alienate his expanding workforce. Euronext has 600 employees at its Paris headquarters, 600 in London, 500 in Amsterdam, 120 in Brussels and slightly more than 100 in Lisbon. Many have overlapping responsibilities. Euronext's staff costs amount to 30 percent of annual income, compared with 16 percent at the LSE and 11 percent at Deutsche Börse.

Théodore denies that he has an overhead problem, arguing that the payoff for his current investments will show up in a couple of years. Euronext will spend E114.3 million between 2001 and 2004 to integrate its markets and clearing operations, analysts estimate. "Once we've finished, there is no reason why our margin shouldn't be close to those of our competitors'," says Théodore.

He also defends his partner-friendly principles, arguing that integration savings are less important than market-share gains. He'd rather have happy, willing partners than impose the kinds of bottom-line efficiencies that drive conventional mergers. "If you aggressively cut staff, it sends the wrong message to people," he says. "I think you will lose in terms of your commercial franchise what you gain in cost savings."

Adds Liffe's Freedberg: "The reason why Théodore stands out from other deal makers is that he listens and then makes a proposition, rather than the other way around. More than either the LSE or Deutsche Börse, he really listened to what we thought would make a deal work."

As consolidation continues , the member-owned exchanges in Madrid and Milan, which will both issue stock in coming months, may be next on the block , Théodore will keep pressing the argument that his approach to mergers makes Euronext a far more desirable partner than its rivals. Consideration for others' patriotism, he hopes, will lubricate a lot of deals. The Continent still has 30 different exchanges using 12 trading systems and 22 clearing and settlement institutions, and many industry experts argue that it needs no more than three or four in the long run. Given his track record, Théodore is guaranteed a seat at any negotiating table.

THEODORE, 55, SEEMS miscast as an empire-builder. His appearance is often rumpled; he speaks softly, sparingly and, in English, haltingly. He is shy to the point of being boring. Far from cutting the figure of a master deal maker, he comes across as the bureaucrat he once was.

The son of Parisian public servants, Théodore inherited a strong sense of patriotism that led him into government service. His mother was one of France's first female judges and a chairwoman of the Paris regional appeals court; his father was a decorated veteran of the French underground in World War II and later a Treasury official. "My parents' generation was influenced by what is known in France as l'esprit de la libération, the desire to rebuild France in the wake of World War II," says Théodore. "In the 1960s, only 25 years after the end of the war, it was natural for me to choose the civil service."

After graduating from the elite Ecole Nationale d'Administration, Théodore joined the French Treasury in 1974. His responsibilities included handling financial relations for France's 14 former West African colonies, promoting direct investment in France and overseeing the banking sector. From 1986 to 1991 he supervised privatizations as head of the department in charge of state-owned companies. At the Treasury Théodore learned the delicate art of balancing conflicting demands and achieving consensus. (Of course, like many French business leaders who were trained to be state officials, Théodore is suspected by some of caring more about securing France's influence in Europe than with making a profit for his shareholders.)

In his last Treasury job, working to privatize building materials giant Saint-Gobain, telecommunications equipment maker Alcatel and the TF1 television network, Théodore impressed and became friends with Société des Bourses Françaises vice chairman and chief operating officer Bernard Mirat. Armed with the crucial support of Jean-Claude Trichet , then Treasury minister and now governor of the Banque de France , Mirat convinced the brokerages and banks that owned the SBF to offer Théodore the chief executive's job.

It was 1991, and after 17 years at the Treasury, Théodore jumped at the chance to cross into the private sector. Although many of his friends thought the SBF would prove a poisoned chalice for the former civil servant, he thrived there. "I wanted to do something by myself," he recalls. "In the Treasury all the important decisions are taken by a minister, who is above the civil service hierarchy. Without the bourse offer, the most likely post I would have found outside the Treasury would have been chief financial officer of a big industrial group, where I would have been answering to a chief executive or a chairman."

When he took the top job at the SBF, Théodore had a relatively modest mandate: to transform a historically loose and troubled confederation of regional exchanges into a centralized, efficient market. He found a system in disarray. French brokerage firms were still coming to grips with the abolition of fixed commissions in 1988, which had caused one fifth of the country's 58 brokerages , the owners of the SBF , to shut down. The bourse's three-year-old electronic order-matching system wasn't built for block trades, and as a result, large transactions in French blue-chip shares were migrating to London.

By 1999, when the SBF was renamed ParisBourse, chief executive Théodore had reversed the decline by pulling off some major coups. He had, for example, successfully lobbied the government to reduce the statutory stamp duty on stock trades and had convinced his member firms to adopt new rules for block trades and to upgrade their trading systems significantly , political triumphs that he attributes to skills he gained in his first career. "Whether it was dealing with African finance ministers who wanted to see their civil servants paid more or the powerful bosses of state-owned companies who wanted to preserve their power by giving us as little information as possible, the Treasury was a school that prepared me for dealing with diverse groups of people," Théodore recalls.

With the bourse's financial health restored and its technology vastly improved, international brokerage activity was moving to Paris and no longer fleeing to London. But that was only an inkling of what the unassuming Théodore could accomplish. Amid gathering speculation about how Europe's financial markets would consolidate after monetary union, Théodore had begun positioning Paris to survive the shakeout. In late 1997 he acquired the French futures exchange, the Marché à Terme International de France, or Matif. As befit the single-currency environment, he didn't confine his thinking to Paris. His vision, he said at the time, was "to move onto an international level while still remaining French."

Indeed, by the end of the 1990s, ParisBourse was gaining international renown. Théodore had sold exchange memberships to London- and Frankfurt-based brokers, and, boosting Paris's technological credibility, he had sold the French exchange's trading system, Nouveau Système de Cotation, to the Chicago Mercantile Exchange, Singapore Exchange and Warsaw Stock Exchange, among others. ParisBourse, in turn, imported the CME's Clearing 21 technology, which enabled it to unify the processing of equities trades with futures transactions on Matif, which would go all-electronic in 1999, and with options transactions on the Marché des Options Négociables de Paris, or Monep, exchange.

In mid-1998 ParisBourse was on the verge of a technology swap with Deutsche Börse: Frankfurt would adopt NSC for equities trading, and Paris would take the Deutsche Termin Börse system for futures and options. The exchanges had signed a memorandum of understanding to that effect; they saw it as the basis for a single, continental European platform that other exchanges would want to join and that could compete with London.

Then a bombshell exploded. While Théodore and the heads of several other exchanges were engaged in exploratory discussions about ways to facilitate pan-European trading, the London Stock Exchange and Deutsche Börse announced plans to launch a common trading platform for Europe's 300 largest issues , the project that would evolve into iX. Ultimately, LSE chief executive Gavin Casey and Deutsche Börse CEO Werner Seifert aimed for a full merger, with a common trading platform for U.K. and German stocks. The alliance threatened to decimate listing demand and trading volumes in the third-ranked Paris stock market and in the rest of Europe's bourses.

"Théodore felt betrayed," says a personal friend. "It looked like Paris had been used by Frankfurt simply to get the leverage they needed to cut a deal with London and to distract Paris from other European consolidation efforts."

The deal also upset other exchange leaders in Europe. In November 1998, after considerable outcry, London, Frankfurt and seven other exchanges , Amsterdam, Brussels, Madrid, Milan, Paris, Stockholm and Zurich , agreed to negotiate a broader merger initiative. Casey and Seifert made it clear, however, that the others would be junior partners; policymaking power would be concentrated in London and Frankfurt.

While the nine exchanges were working on their merger, Théodore concluded that the London-Frankfurt tandem was a threat to Paris and other European exchanges and, by extension, a threat to their listed companies. Those quoted in the Frankfurt and London markets could expect higher multiples, he reasoned, because more money would be chasing fewer stocks. Companies in France and elsewhere would then be vulnerable to takeover by German and British competitors. So Théodore, Möller and Brussels Exchanges CEO Olivier Lefebvre opted out of the Continental consortium and set about organizing Euronext. For the two lowland nations, whose total market capitalization of E878 billion at the time was puny compared with that of London or Frankfurt, Théodore represented a knight in shining armor.

"We had to act because we thought that by doing nothing, we would wind up with a German or English system," says Möller. "We decided to link among ourselves in a way that would preserve our local markets and the companies and organizations built around them, while still making trading, clearing and settlement more efficient."

Théodore saw Euronext as a technology and infrastructure play across multiple asset classes, able to compete on a pan-European scale against London and Frankfurt. Euronext harmonized its trading rules wherever possible, adopting common listing requirements and broker membership criteria. But with characteristic delicacy, Théodore made no attempt to move all listings or members into the same regulatory jurisdiction , one reason the London-Frankfurt iX project crashed and burned. "Exchange franchises are fragile," says Théodore. "You need to have issuer and investor confidence and the regulators' trust. You need marketing appeal. Everybody should consider themselves part of the exchange's constituency."

If the creation of Euronext set the stage for consolidation, the Liffe coup was even more critical. It underscored how Théodore's gentle touch can give him an advantage over competitors. When Clara Furse took over as CEO of the London Stock Exchange in January 2001 , Casey had been forced to resign after the iX plan collapsed , a merger with Liffe was high on her agenda. It would have enabled the LSE to exploit synergies between equities and derivatives trading and clearing on a par with Euronext and Deutsche Börse. Liffe also would have given the LSE technological staff and expertise that it currently lacks. Both Euronext and Deutsche Börse employ hundreds of people in technology and operations; the LSE outsources these functions.

Furse, formerly CEO of Paris-based Crédit Lyonnais's London derivatives unit, wanted to integrate Liffe's Connect electronic trading technology with the LSE's Sets electronic order book to maximize efficiencies and cost reductions across all traded instruments. Liffe officials, however, were more interested in using Connect as the basis for sales agreements and alliances with other exchanges, and Euronext's strategy seemed more compatible with their plans.

But what really pushed Liffe into Théodore's arms was his willingness to offer more generous terms. The LSE was offering £577.8 million, but 63 percent of the purchase price would have been in shares; Paris offered £555 million, all in cash. Théodore also let Williamson and Freedberg keep their autonomy. Where Furse promised that her merger would achieve cost cuts and synergies worth £35 million a year; Théodore suggested a more modest £10 million to £15 million. Perhaps most offensive to the London traders, Furse became furious when she discovered that options packages for Liffe executives would boost the LSE's purchase price, and she lowered her bid accordingly; Théodore was completely unruffled by the news and left his offer intact.

In January Furse was hauled before Britain's House of Commons Treasury Select Committee to explain how Liffe had gotten away from the LSE. Euronext "offered nearly all the gain that we put on the table without any of the pain," Furse said bitterly. "Liffe opted for an easy life. The weakest economic rationale won the auction."

Furse's bottom-line-driven principles may have been sounder, but Théodore scored a major strategic win. The LSE is now on shakier ground , and may be a target for takeover by Deutsche Börse or Euronext. The LSE "has failed to complete two deals [iX and Liffe] in as many years and is at risk of being slowly marginalized in the race to complete acquisitions and alliances in Europe," says Karl Berglund, an exchange company analyst at Deutsche Bank in Stockholm. "Structural conditions for further consolidation do not look promising at the LSE."

For Paris, the victory was especially sweet. Liffe gives Euronext critical mass in derivatives, providing a hedge, so to speak, against downturns in stock activity. Indeed, while volumes declined on world stock markets last year, futures and options exchanges enjoyed a 40 percent rise. Meanwhile, the Liffe Connect system makes Euronext far more formidable in derivatives processing and technology sales. Perhaps most important, Euronext is in a stronger position to lead or influence the next wave of bourse consolidation.

With Liffe, Théodore will have a two-trading-platform structure that should be attractive to traders and investors and could help Euronext entice new exchange partners more effectively than Frankfurt or London can. As its five French, Dutch and Belgian futures and options markets come on Connect over the next year, Euronext will become the second-largest derivatives exchange in the world, just behind Deutsche Börse's Eurex. (And in early 2003 Portugal's stock and derivatives markets will join Théodore's two pan-European trading platforms, after having merged with Euronext this January in return for a 4 percent stake.)

More significantly, by year-end Théodore expects to introduce a single clearing system, based at Euronext's Clearnet subsidiary in Paris, that will net out trading positions not only across borders but also across its equities and derivatives platforms, lowering administrative, technology and margin costs for brokers and investors. In netting, the exchange serves as the central counterparty, or CCP, for both buyers and sellers; members settle trades with one entity rather than with a multitude. At the CCP, countervailing trades can be automatically offset against one another, reducing by as much as 95 percent the number of transactions that exchange members must settle at the end of the day and exposing the market to far less risk than if all transactions had to be settled individually.

Euronext will be only the second big European exchange with a central counterparty (the LSE is the other, using London Clearing House, as does Liffe) and the only one that nets across both borders and products. Deutsche Börse plans to introduce a CCP this year, but it will be only for German-listed securities, and it will not net across derivatives and equities. As for the LSE, it has no derivatives market that its CCP can net against. "Euronext should dramatically reduce not only processing costs but also the margin that brokers and their clients put up," because the value of equity holdings will also be used to offset leveraged derivatives holdings, says Merrill Lynch's Costello. He believes that costs for Euronext's users could come down by almost 50 percent over the next three years.

Today Théodore is preparing for the next wave of exchange consolidation , to the exclusion of almost everything else. He and his wife, Claudine, a dermatologist whom he met at university, have three adolescent children, but Théodore works long days and many weekends; a subscription to Paris's Opéra Bastille provides one of his few escapes. He keeps a low profile, rarely talking to the press, not because he dislikes reporters but because he fears jeopardizing his negotiating position. Théodore's innate discretion may also give him an advantage over more aggressive CEOs when he talks to potential merger partners. Says Euronext COO Möller, "Théodore is extremely knowledgeable, likes life and works hard but does everything in a gentle way, and that more than anything has helped his personal chemistry with others."

AN ECONOMIST MIGHT SEE THE ONGOING shakeout among exchanges as a natural winnowing-out, as inefficient, fragmented trading venues merge into fewer, larger and more-cost-effective entities serving an integrated Europe. But to Théodore and his rivals, it is just as much a chess game. And there are plenty of pieces left on the board.

Despite the consolidation in London, Paris and Frankfurt, Europe still suffers from fragmentation , a legacy of the pre,European Union Continent and the consequence of a continuing tangle of country-by-country legal and regulatory variables. The many exchanges with their many different rules have made it difficult for truly seamless, pan-European trading to become a reality. Among those that have tried to achieve it were Jiway, an electronic, retail-oriented platform started by Sweden's OM and Morgan Stanley and folded late last year into OM's London operation; Easdaq, conceived in 1994 as a Continent-wide market for small caps and acquired last year by Nasdaq Stock Market; and London-based Tradepoint, which, since merging in 2001 with SWX Swiss Exchange to form Virt-x, depends on Swiss shares for most of its volume.

The struggles to conquer the newly unified European securities market underscore how success and survival in the exchange business depend on an iron law of liquidity: Whoever gets the most wins. "These are natural monopoly situations," explains Octavio Marenzi, founder and managing director of Boston-based Celent Communications, an international financial industry consulting firm. "Most countries have one dominant market because people will go to where the most people are and where the best prices are, which tends to be the largest market."

The same goes for clearing and settlement infrastructures: Europe's newly united financial markets have far too many securities processing entities. According to the Brussels-based Center for European Policy Studies, European cross-border clearing and settlement costs 7.5 times what it does in the U.S., where Depository Trust and Clearing Corp. is the sole central counterparty. If Europe moved toward the U.S. model, global financial institutions would have much to gain , and substantial savings to pass on to clients , from consolidated clearing.

Théodore, the LSE's Furse and Deutsche Börse's Seifert are finalists in the consolidation contest. Now they are battling to forge the right combination of market structures, technologies and back-office services to keep aggregating liquidity. Each wants to be the last one, or one of the last two, left standing.

In terms of revenue, the LSE is the smallest of the three: Its estimated £188 million (E249 million) in 2001 was well below Deutsche Börse's E900 million and Euronext's E698 million.

Seifert's Deutsche Börse has greater organizational heft and diversification than the LSE, and he expects to beat back the Euronext challenge with both efficiency and so-called vertical integration. A Swiss-born former McKinsey & Co. consultant with a degree in game theory who became the Frankfurt market's chief executive in 1993, Seifert buys into the natural-monopoly theory of exchange consolidation on multiple levels. He declined to be interviewed for this article, but he has argued that a single organization controlling the entire cycle, from trading through clearing and settlement, can charge the lowest prices.

Trading costs are notoriously untransparent, but according to Deutsche Börse's calculations, the cost of its fully integrated end-to-end processing is 10.2 basis points of the value of an average trade. Euronext, with its tie-in to Euroclear, comes in at 10.8 basis points. Deutsche Börse estimates that it costs 13.7 basis points on average to use the London Stock Exchange and its independent clearing and settling companies, London Clearing House and CrestCo.

Deutsche Börse's next move in the quest for vertical integration is to gain full ownership of multinational clearing organization Clearstream International; it currently owns 50 percent. Virtually all of the 93 banks that own the other half, through holding company Cedel International, have accepted a E1.74 billion cash offer from Deutsche Börse; the deal now awaits approval from EU antitrust authorities. Analysts say that fully integrating Clearstream would boost Deutsche Börse's operating margin to more than 34 percent by 2003.

But some bankers are wary of Seifert's takeover of Clear-stream, fearing that one entity's control over multiple facets of processing will tend to raise costs and stifle innovation. J.P. Morgan Chase & Co. (whose predecessor, J.P. Morgan, once owned Clearstream rival Euroclear) has said it will withdraw assets from Clearstream because it prefers looser, "horizontal" structures to Seifert's vertical integration; other bankers at least privately share that opinion.

With Furse and the LSE regrouping after losing Liffe and Seifert pushing his vertical integration strategy at Deutsche Börse, Théodore positions Euronext as a third way , integrated but sufficiently sensitive to member exchanges' desires that even the London Stock Exchange might find it a congenial match.

Neither Seifert nor Théodore makes a secret of his desire to woo the LSE. To be sure, the London exchange is too big and powerful to be considered endangered. But that hasn't prevented takeover speculation: The LSE's shares, listed since last July, recently fetched a price-earnings multiple of 20 based on estimated 2003 earnings, which analysts say includes an acquisition premium. Deutsche Börse and Euronext were trading at 17.7 and 13 on projected 2003 earnings, respectively.

Yet many observers place their bets on the easygoing Théodore rather than the more abrasive Seifert to win any contest for the LSE. "Seifert's insistence on vertical integration and control actually scares a lot of people in London," says the head of global program trading at a major U.K.-based broker.

In addition to his less threatening personality, Théodore holds an important tactical card. With the purchase of Liffe, Euronext gained a 17 percent stake in London Clearing House, the main clearer for both the derivatives exchange and the LSE and a potential partner for Paris's Clearnet. Moreover, Liffe accounts for more than 50 percent of LCH's revenues. "If Théodore were to use that clout to push along a merger with LCH, you would have an immensely strong pan-European clearinghouse capable of delivering important efficiencies in cross-border and cross-product netting," says the head strategist of a rival European stock exchange. "After linking clearing, a merger in equity markets between the LSE and Euronext would be the logical next step to get even more efficiencies."

Ever in character, Théodore denies that he would try to use that minority stake or Liffe's order flow as leverage to cut a deal. "Mergers must be friendly operations, and that is not consistent with having leverage," he declares.

But Théodore and officials at LCH say that they would like to cooperate more closely, and they have been discussing ways to establish links between their respective products and platforms. "Users have said that they would like to have a more unified, more organized clearing organization," says Théodore. Adds Sir Michael Jenkins, chairman of LCH, "Cooperation, or even a merger with Euronext, would from our point of view be in the interest of the market."

Jenkins won't comment on how likely a merger is, but he says that issues of cooperation between the LCH and Clearnet should be "resolved this year." For a full merger, Jenkins says, the 117 broker-owners of LCH would demand that Euronext's ownership of the combined company be less than 50 percent.

A close confidant of Théodore's notes that the Euronext chief has pragmatically leveraged his clearing and settlement assets in the past. He gave up control of Sicovam, the French exchange's settlement arm , responsible for the final link in the transaction chain after clearing and netting , when he agreed to merge it with Brussels-based Euroclear in 2000. This source predicts that Théodore will similarly cede clearing to further his consolidation agenda: "Once Théodore has finished turning Clearnet into a true cross-product and cross-border operation, he'll relinquish control of it. If he has got to see Euronext's ownership of Clearnet drop from today's 80 percent to below 50 percent to promote further consolidation, he won't hesitate to do so."

Meanwhile, in the higher-profile realm of stock exchange consolidation, Madrid's Bolsas y Mercados Españoles, Europe's fourth largest in trading volume, and Milan's Borsa Italiana, the fifth largest, are Théodore's next likely targets. But although their officials support consolidation, they are in no hurry to rush into any acquirer's arms. "We are in a very comfortable situation," says Antonio Zoido, CEO of the Spanish bourse. "We don't feel our liquidity threatened."

Zoido's counterpart in Milan feels much the same way. "Clearly, the best way to destroy value long term is to maintain the fragmentation of Europe's markets," says Massimo Capuano, chief executive of Borsa Italiana. "But I am under no pressure to adopt either the platform of Euronext or Deutsche Börse or some other trading system today." According to Capuano, the European Union's 13 sets of corporate laws, as well as rules that oblige the nationals of many countries to use domestic clearing and settlement systems, mean that even if he hooked up today with another trading platform, the savings for his users would be minimal.

"The pressure to link up with another system will come from one of two things , either more harmonized regulations or further consolidation," says Capuano. In February two EU advisory bodies issued a mandate to speed harmonization of Europe's securities laws. But such initiatives have a dismal history, and the catalyst for additional cross-border clearing systems is more likely to be a merger decision by the Spanish or London exchanges.

Théodore believes that things could start to heat up at the end of this year, when the Madrid exchange goes public. (Milan plans a similar move, probably in next year's first quarter.) But he is cagey about his own next move. "We are very busy participating in the forefront of European market consolidation. That will continue, although at this point I can't tell you how or with whom," he says. Whoever his future partners may be, they're likely to enjoy considerate treatment at the consolidator's hands.