In Selling, the NYSE Reveals It Has Lost $2.8 Billion of Value

Traders work on the floor of the New York Stock Exchange on Dec. 19, 2012 Photograph by Scott Eells/Bloomberg

The New York Stock Exchange finally found a dance partner. Ten months after European regulators blocked its $9.5 billion attempt to merge with Germany’s Deutsche Börse, the 200-year-old stock exchange is selling itself to a much younger Atlanta-based rival, the IntercontinentalExchange (ICE), for $8.2 billion.

ICE, an options and futures exchange, is paying $33.12 a share, which at the time of the deal was about a 37 percent premium. Thursday morning, shares of NYSE Euronext jumped more than 7 percent, to above $31, wiping out what had been a year of steady losses. Shares of NYSE were trading around $22 in mid-November. A third of the deal is being funded with cash.

This is the second time ICE has bid for at least part of NYSE Euronext. In 2011 it teamed up with Nasdaq OMX Group to counter the Deutsche Börse offer with an $11 billion hostile bid that fell apart within weeks after the U.S. Justice Department raised concerns over antitrust violations.

This time around, a deal was more than welcome with NYSE. In a statement released Thursday morning, Jan-Michiel Hessels, chairman of the board of NYSE Euronext, says, “The Board of NYSE Euronext carefully considered a range of strategic alternatives and concluded that ICE is the ideal partner for NYSE Euronext in an evolving market landscape.”

The deal caps a rough year, if not a rough decade, for the vaunted U.S. exchange. Ever since U.S. regulators passed rules to foster more competition among exchanges in the late 1990s, NYSE has steadily lost market share to smaller electronic rivals, such as BATS and Direct Edge, as well as to private trading venues known as dark pools, which sometimes offer better prices and faster execution times. As investors remain spooked from the market crash four years ago, and uncertainty lingers about the shaky global economy, trading volumes have continued to decline, giving NYSE a smaller piece of a shrinking pie.

In November, NYSE reported that its third-quarter profit fell 42 percent. After its failed merger, NYSE focused on cost-cutting to help offset lost revenue. But even reducing costs by $82 million so far this year hasn’t staunched the bleeding.

“It’s been a much better year for ICE,” says Howard Tai, a senior analyst at Aite Group. ICE has benefited from increased energy and commodity trading that takes place over its electronic platform, particularly in the oil markets. West Texas Intermediate, which trades on the New York Mercantile Exchange, is no longer considered the world’s benchmark oil contract. Brent, which trades on the ICE, surpassed it in mid-2012. Annual volume for ICE Brent futures has risen 20 percent year-over-year as of June 2012.

The lower price for NYSE, $2.8 billion less than what was offered not even two years ago, reflects the current state of the stock market, says Tai. “The stock trading business isn’t what it once was,” he says. “Trading has been fragmented across so many different venues. The primary exchanges are no longer the destination of choice, and that’s reflected in this valuation.”

This summer NYSE got creative and ended up winning SEC approval of a temporary plan to try to lure back trading volume it has lost over the years to dark pools and wholesaler brokerages that fill orders internally rather than sending them to exchanges. This “dark trading” makes up about a third of all equity volume. The dark pools and wholesalers that execute these trades off exchanges aren’t subject to the same rules and regulations as the public exchanges, which feel they’ve been put at a disadvantage. At a U.S. Senate subcommittee hearing this week on market structure, officials of the NYSE and its rival Nasdaq told legislators that dark pools are bad for investors.

The combined NYSE and ICE exchange will be a formidable operation. ”It’s probably the correct model going forward,” says Tai. “A centralized place for transactions across multiple asset classes. NYSE realized it could no longer be a one-trick pony.”

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