By Joseph Weber
After winning his hard-fought campaign to speed the growth of electronic trading and take the New York Stock Exchange public through a tie-up with Chicago's all-electronic Archipelago Exchange (AX ), NYSE Chief Executive John Thain talked big about the combo's prospects. The deal, overwhelmingly approved by NYSE members on Dec. 6, will move the exchange toward "becoming a global multiproduct marketplace," he said.
It's not the rest of the world, however, that Thain has to worry about -- at least for now. Thain's biggest rival remains the Nasdaq stock market.
"The NYSE is much more threatened by Nasdaq than [it is] by Euronext [one of the big European exchanges]," argues Robert Gasser, who served on Archipelago's board a few years ago and who now is chief executive of NYFIX, a technology company that has worked with both the NYSE and Nasdaq.
Nasdaq was automated long before Archipelago, and it remains the biggest competitor to the New York Stock Exchange for trading in NYSE-listed stocks, which are available through other exchanges. The NYSE's share of such stocks slipped in November to 74%, the lowest in many years.
Looking forward, Nasdaq is the NYSE's major competitor for trading volume and new listings. Just as New York is bulking up with Archipelago's computers and electronic-trading savvy, Nasdaq is building up itself with a deal -- announced last April and cleared by the Justice Dept. Nov. 16 -- to buy Arca rival Instinet (INGP ).
OLD VS. NEW.
Certainly, investors seem to be reacting as if the battle between the two giant U.S. bourses were the one to watch. Figuring that Archipelago deal would bolster the NYSE and make life tougher for Nasdaq, investors lopped 4.23%, or $1.78 a share, off Nasdaq's own stock, trimming it to $40.26 a share on Dec. 6. By contrast, investors in Arca, who have long anticipated approval of the deal with NYSE, left it largely unchanged, trimming it just 43 cents, to $59.95 a share.
The fact that the fight will be chiefly fought at home doesn't make it much easier for Thain and Arca CEO Gerald Putnam. Once this deal closes -- perhaps as soon as January -- they'll have to come up with methods to smooth the way toward more electronic trading in New York. For now, they have pledged to maintain floor trading even while boosting the share done on computers. It's uncertain how much will remain in the old-fashioned, floor-based system.
Some analysts are betting that the floor will lose big time. The so-called "specialists," floor-based outfits that stand ready to buy and sell stocks on the NYSE, could wind up with as little as 25% of the New York-traded volume within a year. That's pretty dramatic when you consider that today they handle virtually all the volume.
"It's almost certain that we're going to see 75%-plus of the NYSE volume migrate to electronic execution," says Bill Cline, head of global capital markets for consulting firm Accenture.
Cline and others contend that specialists will be helpful in coordinating trades for smaller, lesser-known, and lesser-traded stocks. They could also come in handy in big-block trades, where large numbers of shares are sold and where traders don't want the sales to sharply move the prices. Still, it's unclear whether there will be much profit to keep specialists interested in such deals as electronic volume grows, and the traditional floor may prove to be unnecessary. "It may just simply not be cost-effective to maintain the physical trading floor," says Cline.
One benefit for the New York Stock Exchange: The deal should open up new markets. It will take on the options business that Archipelago moved into when Arca acquired the Pacific Exchange in September. Former NYSE Chairman John Reed believes the combined exchanges may want to move into futures trading, treading on the turf now held by Chicago's Mercantile Exchange and Board of Trade. "You're going to see a coming together" of futures and equities markets over time, Reed told BusinessWeek Online.
The next question: Will the Chicago Merc be interested in teaming up with New York? As public companies, both could be in better position to do a deal, though the performance of their stocks would determine who takes the driver's seat.
The CME's stock has soared since it went public in late 2002, growing from its $35-a-share offering price to about $359 a share now. The rival Chicago Board of Trade offered shares to the public at $54 apiece in October, and its stock now trades at about $97. In Europe, futures and equities are often traded on the same bourses.
Such deals likely are still a long way off. For now, Thain has to oversee the blending of Arca and the NYSE. The global competition can wait. The fight at home can't.
Weber is BusinessWeek's Chicago bureau chief