The Corner

Whoa two! On Feb. 24, 2011, I started out this column with word “whoa,” which basically means slow down and reconsider. The column was in response to the “claptrap regarding the proposed merger between NYSE Euronext and the German exchange operator Deutche Bourse AG.” I stated at that time, “I can’t remember when there has been so much misinformation, disinformation and misstatements surrounding a combination of two industry giants.” In the end, after many months, European regulators put the kibosh on that merger early this year.

Last Thursday, NYSE Euronext and IntercontinentalExchange, Inc. (ICE) made the announcement that ICE was to buy NYSE Euronext. Appearing together on the venerable NYSE Floor, NYSE CEO Duncan Niederauer and Chairman and Chief Executive Officer of ICE, Jeffrey Sprecher, laid out some of the details of the transaction. The combination still needs to be approved by shareholders and domestic and foreign regulators. In the end, my suspicion is that this deal will go trough.

As derivative markets, such as future and option exchanges, have grown bigger and more centralized, cash markets such as traditional stock exchanges have experienced a rapid increase in competition from all directions. The U.S. stock markets have become multiplatformed, fragmented and somewhat non-transparent. Volume at the major exchanges has declined, putting pressure on earnings and operations. The NYSE is no stranger to this and has therefore bought their way into other exchanges and businesses.

In 2007, NYSE Group merged with Euronext to form NYSE Euronext. Euronext was a combination of the Paris, Amsterdam, Brussels and Lisbon stock exchanges and the London International Financial Futures Exchange or Liffe. In what NYSE Euronext later stated, “It brought together major marketplaces across Europe and the United States whose histories stretch back more than four centuries” this combination was historic.  Prior to the NYSE Euronext merger, NYSE Group was formed by a reverse merger with Archipelago Holdings in March of 2006. This allowed for the first time, the movement from a seat based private not-for-profit company to a listed public company under the name of NYSE Group. In October of 2008, NYSE Euronext bought the American Stock Exchange.

All of this action plus more that has occurred with foreign exchange mergers suggested that the rate of consolidation was not going to change. Scales of economy and more control over the business of clearing derivative transactions and data dissemination are a growth priority of exchange operators. The big move here is for ICE to gain access to the European derivatives market through NYSE Euronext’s Liffe operations. “ICE is after Liffe, that is the crown jewel of NYSE Euronext,” said Peter Lenardos, who is an analyst at RBC Capital Markets. “Strategically it makes sense for ICE to enter the European derivatives space in a meaningful way.”

As to the rest of NYSE Euronext, it appears by statements made by executives of both companies, the U.S. based stock market run by NYSE Euronext is safe while the European stocks exchanges could well be spun off. Spun off to whom? Deutche Bourse, the London Stock Exchange or other entities such as NASDAQ may have an interest. What will happen in the end is far from known. Heck, the combined company may well be kept together.

As to the speculation about who runs what and what is its name? In the article I wrote last year I addressed the “hysteria surrounding” the Deutche Bourse/NYSE Euronext merger stating, “People have gotten all hung up on the name. A friend of mine in New York said that his uncle called him and really wanted to know if they were going to take a ‘blowtorch’ to the NYSE building and burn the name off of it. Most likely, each of the exchanges that operate in each of the different countries will keep their existing names just as in the NYSE Euronext merger. And yes, there will be a new holding company name.” Ditto for this new deal!

It appears as to who runs what, that Sprecher will be the Chairman and CEO of the new company and Niederauer will be president of the new company and CEO of the NYSE division. Not too much of a change here as the Chairman of NYSE Euronext, since its inception, has never been from the NYSE side. When the NYSE Euronext merger occurred Jan-Michiel Hessels became chairman of the new company and he comes from Euronext Amsterdam, now NYSE Euronext Amsterdam. Should this deal go through there it will be dual headquartered in Atlanta and New York.

Here is where it gets real interesting. In the Deutche Bourse/NYSE Euronext deal, many of the shareholders in Deutche Bourse were U.S. based institutional investors and mutual funds. As I stated in the 2011 column, “Jeffrey Cane, DealBook’s managing editor, writes that ‘despite this very multinational prospect for the bedrock of the New York financial center, one thing would remain the same—American money. Half of the 10 biggest active shareholders of Deutsche Bourse are U.S. institutional investors’…” In this new deal between ICE and NYSE Euronext you have a fair amount of cross ownership—once again.

I am sure as the weeks go by, we may see others jumping in to the fray, just as we did back when the Deutche Bourse/NYSE Euronext deal was on. We also may hear of how this will be the end of the NYSE as we know. Don’t bet on it. Again, in my 2011 column I wrote, “Finally, back in 1975, Chris Wells wrote his book “The Last Days of the Club.” In it he argued that

‘The Club’s’ (NYSE) days were shortly numbered and the big banks would soon run their own club. Now, 36 years later, NYSE still sits on the corner of Wall and Broad streets and there are still humans at the center of the trading floor. Should this combination [the Deutche Bourse/NYSE Euronext merger] occur my suspicion is that the famed words ‘The New York Stock Exchange,’ which are carved in stone, will still be there for years to come at the Big Board’s entrance at 11 Wall Street.”  Ditto again if ICE/NYSE Euronext is completed!

Quote of the Week: “In the early 1970s, as it had in the mid-1930s, the N.Y.S.E. entered a chrysalis from which would emerge some new or hybrid form. As with so many other institutions in America at mid-decade, its final shape remains a mystery.”—Robert Sobel in his 1975 book “NYSE.”

Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment adviser – specializing in the management of stock & bond portfolios in companies which are listed on the NYSE.

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