Busy Trading, Big Profits for NYSE

With the big merger with Euronext out of the way, the trans-Atlantic exchange may be looking for new acquisition targets

Investors saw Thursday how NYSE Euronext (NYX), the world's first trans-Atlantic stock market, is faring since the April merger of the New York Stock Exchange and the European exchange operator Euronext. The answer? So far, so good.

For the second quarter, NYSE reported earnings of 62 cents per share, basically meeting analysts' expectations. Last year, the NYSE Group alone reported earnings of 39 cents per share.

Investors appear to have been expecting even better results. The shares retreated in NYSE trading Aug. 2, falling 2.17% to $75.31, well below their 52-week high of $112 reachjed last Nov. 22.

The new company sits atop the booming, and increasingly competitive, exchange business. The rise of hedge funds and ultra-fast electronic trading has boosted trading volumes worldwide. The popularity of new products to trade ­— including electronically traded funds, or ETFs, and new derivatives ­— has added to exchanges' money-making opportunities.

The industry is rapidly consolidating. The Chicago Mercantile Exchange (CME) just won approval for its purchase of the Chicago Board of Trade (BOT) to create the world's largest derivatives exchange.

Executives at NYSE Euronext, only formally joined in April, have not ruled out another acquisition that would further the NYSE's reach into new products or countries.

"It's so early in the process of combining these two companies" that it's hard to assess how the merger is going, says Standard & Poor's equity analyst Jason Willey. (S&P, like BusinessWeek, is a unit of the McGraw-Hill Companies.)

NYSE executives did say the companies is still on track to find $375 million in cost savings from the merger. One reason for the merger-mania among exchanges is that they can save money by sharing their costly technology platforms.

The most likely candidate for the next acquisition would be a major player in the futures market, analysts say. The futures business offers high profit margins, but it would be very hard for a outsider like NYSE to break in without buying a major exchange, Willey says.

Some have speculated that the IntercontinentalExchange (ICE) or Nymex, the New York Mercantile Exchange (NMX), might be top targets for NYSE.

"We see upside if NYSE can generate merger synergies faster than expected and build into the more lucrative futures business through an acquisition," JPMorgan analyst Kenneth Worthington wrote this week. (NYSE Euronext is a JPMorgan client.)

Executives gave no clues as to whether an acquisition was likely soon. "As we think about these projects, we are taking a very measured approach," chief financial officer Nelson Chai told analysts. Asked if he was hinting a deal could come soon, he said: "We are actually not trying to set anybody up for anything."

Recently, exchanges like NYSE Euronext have benefited from huge spikes in trading volume. They can thank the market turmoil caused by credit worries that caused a big sell-off in stocks in late July (see BusinessWeek.com, July 28, 2007, "Exchanges Benefit from Record Volumes").

In the second quarter, which doesn't include July, NYSE Euronext saw record trading volume, with its European exchanges leading the way. The NYSE has also become a popular place for the trading of ETFs.

However, in the U.S. the well-established NYSE and Nasdaq exchanges are battling to hold onto market share. New regulations this year made it easier for NYSE-listed stocks to trade on other exchanges. The new competitors in equity trading are regional exchanges or brand-new electronic platforms. "Certainly competition is picking up," Willey says.

The fierce competition in stock trading has prompted NYSE to expand beyond equities to other traded products. Willey believes options-trading may be a profitable opportunity, while a new bond trading platform is still unproven.

The exchange is trying to diversify to minimize the risks of focusing too much on one country or type of traded product. "Anytime you can diversify, there's obvious benefits to that, particularly in volatile markets," Willey says.

Despite meeting most expectations, NYSE Euronext stock fell Thursday, starting out in positive territory but then falling more than 2.5% by mid-afternoon.

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