The Corner for Nov. 22, 2013

Two hundred twenty-one years ago a handful of men signed the Buttonwood Agreement at 68 Wall Street to form the New York Stock Exchange. In 1903 the iconic exchange moved into its current location on the corner of Wall and Broad streets. In 2005 there was a merger between NYSE and Archipelago Holdings, which also owned the Pacific Stock Exchange. That merger for the first time resulted in the NYSE going from a seat based, privately owned company to a public listed entity. Then in 2007 NYSE merged with Euronext to form NYSE Euronext. Euronext is home to four European bourses in Amsterdam, Brussels, Lisbon and Paris and one derivative exchange, the London International Financial Futures and Options Exchange (LIFFE). In 2008 NYSE Euronext bought the American Stock Exchange.

Last December this column covered the announcement that NYSE Euronext was pursuing an agreement to be bought by the Atlanta-based 2000 upstart IntercontinentalExchange (ICE) headed by Jeffrey Sprecher. Last Wednesday, Nov. 13 that deal closed bringing to an end the 221 year independence of the NYSE.

Wow! That’s what a lot of folks are saying. I say hold your horses there isn’t much surprise here, especially after European regulators put the kibosh on the 2012 merger between NYSE Euronext and Deutsche Boerse AG.

Here’s the deal, for decades the Big Board controlled 80 percent or more of the daily trading volume in NYSE listed issues. Over the past 20 years that has dwindled to approximately 20-25 percent, as more competition and regulation has stung NYSE. The NYSE Euronext combination has not yielded the synergies first expected and the data centers in Basildon, England, and Mahaw, NJ, have not worked as planned — so things needed to change.

According to the Financial Times, challenges that ICE now has is “much greater in terms of staff, scale and geography than anything Mr. Sprecher has undertaken before. ‘This [NYSE] is a big conglomerate of stuff that has never been integrated and now Jeff gets to do one giant integration’…According to former insiders, the struggles of its technology business stemmed from NYSE’s halfhearted embrace of the changes taking place in the industry. ‘The biggest mistake an equity exchange [can make] is to try and not … be an equity exchange,’ says one banker. Now how NYSE defines itself will be in the hands of Mr. Sprecher.”

The new company runs 17 global exchanges and six central clearing houses. It’s the world’s largest capital raising operation. The deal was an $11 billion transaction that resulted in a combined $23 billion capitalized company — a giant corporation for an exchange operator. The company is in charge of global exchanges across a business portfolio comprised of interest rates, equities and equity derivatives, credit derivatives, bonds, foreign exchange, energy, metals, coal and agricultural commodities.

Sprecher commented in a statement, “ICE now leads in terms of the breadth and depth of services, best-in-class technology and access to markets and capital. We have significant opportunities ahead both to grow and to make the business more efficient and competitive. Our team will continue to keep our customers front and center on everything we do, while bringing new products to market in real time. We look forward to unlocking value together both for customers and shareholders.”

Former NYSE Euronext CEO Duncan Niederauer remains at the new company with the new title of ICE President and NYSE Group CEO. “This is a great strategic fit for both companies. We now have a stronger and more diversified business model, which leverages the iconic NYSE Euronext brand, our leadership in listings, equity options and interest rate markets with ICE’s attractive portfolio of markets, clearing houses and technology for the global derivatives markets,” said Niederauer.

Many have commented over the past year that the real target of this transaction for ICE was the London-based LIFFE derivative exchange and not the stock trading operations of NYSE Euronext. While it is most likely that ICE will spin off the European stock exchanges and has to deal with the underperforming data centers, the U.S. based operations such as NYSE, NYSE Amex Options, NYSE Amex, NYSE Alternext will be able to be transformed and enhanced without European regulation considerations. As it stands now, regulators on both sides of the Atlantic need to review any structural changes, acquisitions or mergers in the regular stock trading cash markets of NYSE Euronext. The new company should be able to move fast in restructuring the NYSE, reducing headcount and figure out what to do with the data centers.

Much of the NYSE trading floor has been emptied because of the huge consolidation that has taken place over the past 20 years in the specialist business. Specialists, now called Designated Market Makers have gone from 45 firms to just six and now operate in the Main Room. Market makers are at the center of the market and each stock is assigned to one. Back in the day, these firms handled 25 to a few hundred companies. Now, these specialists handle many hundreds of stocks because the floor is more automated through computers and other trading technology. The New Blue Room and Garage no longer have trading operations in them and the Old Blue room will most likely have its operations moved to the Garage which is under renovation.

NYSE is going to see reduced headcount as Sprecher is known for running a very lean and mean operation at ICE. He has about 1,000 folks at ICE and NYSE has 3,151. He is looking for the exchange to act more like an entrepreneurial organization. “I hope I can convince the NYSE employees to embrace that style of business and accept a certain amount of failure,” Sprecher said yesterday.” Any more-mature company has a hard time with that, but I really think that in today’s era companies need to move quickly.”

Finally, stocks markets in the U.S. have become multi-platformed and fragmented which has led in part to the May 2010 “Flash Crash” and many other glitches. With Sprecher at the helm and plans to spin off the European bourses, it will be crunch time for “The Corner” at 11 Wall.

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

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