It says something curious, and telling, that within the $US8.2 billion agreed acquisition of NYSE Euronext by IntercontinentalExchange announced overnight, the 220-year-old New York Stock Exchange – once the world’s premier stock exchange and the flag bearer for capitalism – is regarded as a peripheral asset.
The Atlanta-based ICE, founded in 2000 as an energy exchange, tried and failed to buy NYSE Euronext last year in a $US11.3 billion joint bid with Nasdaq OMX that was blocked by regulators, primarily because of the overlaps between Nasdaq and NYSE. This time, bidding alone, it is regarded as likely to get the deal past the anti-trust authorities.
The strategy behind the acquisition is straightforward. ICE has strong positions in commodity trading and derivatives while Nasdaq OMX owns LIFFE, the London-based derivatives exchange.
The merged group would create a substantial global player in derivatives trading and clearing and settlement, with near-dominant energy, commodity and some fixed interest trading in Europe and a stronger position in the US to compete with CME Group, the world’s biggest derivatives platform.
At a point when, in response to the financial crisis, regulators globally are forcing over-the-counter derivatives onto exchanges and into clearing houses there ought to be an explosion in activity on the major platforms as tens of trillions of dollars of derivatives are migrated out of the shadow banking system.
The reality that cash equities is a sideshow within the deal has been underscored by ICE’s flagging of a spin-off of NYSE Euronext’s European equity markets businesses. While it will probably keep the NYSE, that inclination appears to be motivated more by a branding issue – the retention of a trophy asset – than by economic factors.
The changing face of stock markets around the globe, which have been under assault from competition from new technology platforms and players that have stripped profit and diverted volumes, has been vividly demonstrated by the declining relevance of the NYSE. It accounts for only 20 per cent of the trading in the stocks listed on its own Big Board.
The emergence of dark pool, electronic communications networks, high frequency and algorithmic trading has seen the traditional exchanges and their cash-settled equities focus slip inexorably towards near-irrelevance.
The ASX, of course, is fighting a rear-guard action in this market against the rising tide of those same forces, arguing for stronger regulation of dark pools and execution and some new regulatory imposts on high-frequency trading.
It is getting a sympathetic hearing from legislators and the Australian Securities and Investments Commission, which has foreshadowed introducing some new measures to discipline activity both outside the "lit" markets and within them to try to avoid the fate of the US exchanges, which are now predominantly forums for high-frequency trading. The big investors have fled for the less manipulated environments of the dark pools.
Having had its monopoly in equities trading open up to Chi-X, ASX is now trying to stave off the introduction of competition to its clearing and settlement functions, although there are signs that it is losing that battle.
Equities trading isn’t a big business for ASX – it generated about $36 million of revenue last year, or about six per cent of ASX’s total revenue. Add clearing and settlement revenue and the equities-related revenue amounts to a more sizeable $124 million. ASX also, as a result of its merger with the Sydney Futures Exchange in 2006, has a very sizeable derivatives trading and clearing business.
The ICE bid for NYSE Euronext, which essentially confirms the near-irrelevance of traditional exchanges and the growth in derivatives and clearing houses, has re-started the stalled process of global consolidation of securities markets activity.
The ASX was thwarted in its attempt to merge with the Singapore Exchange and faces fragmentation of its activities as the legislators and ASIC pursue competition for competition’s sake, despite the surprisingly small economic benefits, and potentially significant costs, associated with the fragmentation of ASX’s former monopolies.
How ASX fits into a global industry landscape where trading and clearing are dominated by a relative handful of international and mainly northern hemisphere platforms isn’t clear but it would seem logical that if it can’t generate more scale and diversity to its operations and extend its reach into the region or beyond the inevitable erosion of its franchises by new competitors and new technology could render it, too irrelevant.
A new squeeze for New York's trophy bourse
The sale of NYSE as an attractive brand, but peripheral asset, shows the extent to which dark pools have swallowed its trade. It raises uncomfortable questions about the ASX's future.
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