NYSE Bell Tolls for Exchange That Fell Behind
The name on the building will remain and the opening bell will continue to ring every trading day. But an era is about to end, sadly, with the agreement by the New York Stock Exchange to sell itself to IntercontinentalExchange Inc. (ICE)
The contrasts between buyer and seller are stark, and go a long way to explain the deal’s backstory: The NYSE is the world’s largest stock market where the trading floor and colonnaded structure in the heart of Wall Street are symbols of American-style capitalism.
ICE, as the buyer is known, offers mostly electronic futures trading and clearing. For better or worse, the NYSE and its focus on a shrinking equities market is the past, and ICE, which specializes in the booming derivatives business, is the future. The wonder isn’t why the NYSE is being acquired by an arriviste, but what took so long.
Even if ICE keeps the NYSE (NYX) and its floor intact, as it has promised NYSE officials and New York’s congressional delegation, it is a bittersweet moment for the Big Board. Its roots go back to 1792, when merchants gathered under a buttonwood tree on Wall Street to trade Revolutionary War bonds.
The exchange clung to its trading-floor traditions for too long, although in recent years it bravely tried to transform itself. ICE, based in Atlanta and only 12 years old, is barely out of diapers. What it lacks in sophistication it makes up for with a willingness to throw out the rulebook and experiment with new technologies and trading instruments.
The NYSE’s reputation had faded over the last decade for many reasons, including a scandal in which floor traders were accused of collusion. Former Chairman Richard Grasso’s $140 million pay package in 2003 highlighted the old-boy atmospherics.
Once regulators in 2005 made it easier for low-cost electronic markets to compete, the NYSE bought its own electronic facility and became a public company. In spite of that, market share declined, and today the NYSE does only 21 percent of the trading in its own listed stocks.
ICE, at any rate, isn’t interested in trading stocks. Instead, it’s looking to build up a global derivatives trading operation. To that end, it is eager to get its hands on the NYSE’s London-based futures market, known as Liffe, which is a dominant player in interest-rate futures.
Meanwhile, seismic changes are about to hit markets around the world. Regulations to enforce the Dodd-Frank financial reform law will require trillions of dollars’ worth of derivatives trades to go through clearinghouses, which hold collateral from both parties to a trade to reduce the risk that a default will harm the entire financial system.
ICE, already a player in the clearinghouse business, wants a bigger piece of the pie. It will face many competitors, and the strongest will be the CME Group Inc. (CME), the Chicago powerhouse that controls 90 percent of the U.S. futures market and is itself the product of a merger.
Just as exchanges are preparing for all of this, regulators must, too. It won’t be long before traders are more interested in getting a slice of risk, such as exposure to fast-growth startup companies or the liquefied natural gas business, and agnostic about the venue or the specific type of instrument.
They may not care much whether they buy or sell a stock, a future, an option or an exchange-traded fund, so long as they are able to get the risk exposure, and with it the anticipated returns.
In this converging world, an exchange that can offer platforms to trade and clear all those instruments might be the big winner. The U.S.’s fragmented regulatory system, in which the Securities and Exchange Commission oversees equities and the Commodity Futures Trading Commission regulates commodities, will have to adapt -- perhaps even merge, as well.
While they are at it, regulators also must get a better handle on so-called dark pools, the trading that takes place off-exchange among Wall Street banks and brokerage firms. The shift in trading away from regulated exchanges is another reason for the NYSE’s decline.
The disaggregation of stock trading makes it less likely that buy and sell orders will meet, resulting in reduced efficiency, higher trading costs and lower returns.
With such a proliferation of players, regulators must be careful to maintain a level field. It’s crucial that all exchanges and clearinghouses meet the same standards of transparency. They should also be required to make market data accessible to all.
It’s widely known that the SEC is more of a micromanager of stock markets than the CFTC is of commodities exchanges. The bond market, meanwhile, barely gets any regulatory attention. The system of checks and balances should be the same no matter what instrument is traded, or where.
For all its drawbacks, the NYSE remains the iconic Big Board -- the forum where the giants of the corporate world are listed. ICE, lacking a global brand, is buying one of the world’s marquee names. It should be careful not to tarnish it.
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