The $8.2 billion acquisition of NYSE Euronext (NYSE: NYX) by Atlanta-based IntercontinentalExchange (NYSE: ICE) is that rare kind of transaction that captures in a single moment the magnitude of the transformation that’s taken place over decades in a given industry. Imagine Google (NASDAQ: GOOG) taking over The New York Times (NYSE: NYT) and your local phone companies and you’ll have an idea of what this takeover represents for the global evolution of stock exchanges and other trading places.
The deal exemplifies just how much technology has transformed the world of trading. The floor of the New York Stock Exchange bears no resemblance to that of the 1990s, when at the end of the day floor traders would be standing ankle-deep in paper, or even a decade ago, when wending your way from one part of the trading floor to another was as perilous as jaywalking across Times Square or the Champs-Elysées at rush hour. Today, with so much trading having shifted to computers, sets for major financial news networks occupy space on the venerable floor once occupied by trading posts and the atmosphere can feel downright hushed, even mid-afternoon.
The deal – and the fact that the acquirer isn’t the older, more established exchange with its roots in the trading of securities, but the upstart 12-year-old futures trading platform – captures the magnitude of those changes that have swept through the trading world. It is about more than the fact that traders no longer feel they need to stand beside each other and study each other’s expressions or body language to understand what is going on in a market; that computers can convey that information almost as effectively and far more efficiently. Technology has made trading global, has made it a 24-hour, 365-day-a year event; it has made it far more liquid, far faster and more dominated by institutions able to invest many tens of millions of dollars in new trading technologies.
It also has made it far less profitable for many participants, from the “$2 brokers” who once thronged the Big Board’s floor (and who earned their moniker from the fact that they would pocket a fee of $2 each time they executed a trade on an order from a big brokerage house) to the exchange itself.
The last two big mergers in which the NYSE Euronext has been involved have reflected some of these changes. First came its reverse merger with Archipelago, the online trading platform, that transformed the exchange from a membership organization into a publicly traded company whose stock listings included its own shares. Then came the merger with Euronext, a group of European cash (stock) markets and futures and options-trading exchanges. The first deal symbolized the importance of technology; the latter, the shift to cross-border exchange groups and the significance of exchange-traded derivative products, such as futures and options.
Enter ICE. IntercontinentalExchange has built its entire business around these products: contracts based on agricultural commodities in the United States and on European energy commodities (like the key Brent crude oil futures contract) in London. Crucially, it has emerged as a key player in financial futures and options, trading securities tied to the performance of currencies and on the Russell stock indexes, as well as building the world’s biggest clearing house for the now-infamous credit default swaps. It is these products and not plain vanilla trading of stocks that are the highest growth businesses: While NYSE Euronext’s revenues have tumbled 32 percent over the last five years, those of ICE have soared 131 percent. (Revenues at Chicago-based CME Group (NASDAQ: CME), which has built an empire on trading financial futures, have climbed 87 percent in the same time frame.) This merger simply confirms the dominance of these new products in the 21st century.
The origins of today’s NYSE Euronext predate the creation of the United States as an independent nation: European markets that form the basis of the Euronext network in Amsterdam and Paris go all the way back to the 17th and early 18th centuries, respectively. In the United States, the venerable Big Board dates to the 1792 Buttonwood Agreement that sought to impose some order on the ad hoc trading of government bonds and other securities on street corners on Wall Street.
Yet it is ICE that is acquiring NYSE Euronext, viewing the cash stock trading business as an adjunct to its own, rather than the reverse (the Big Board picking up ICE to acquire a higher-growth business). New trading technologies and products have overtaken the centuries-old business at the root of NYSE Euronext’s business, and it’s too late for them to keep playing catch up.
What ICE is really after is NYSE Euronext’s London-based futures exchange, called Liffe, not the cash trading business, which it would view as an interesting if not terribly lucrative sideline. With NYSE Euronext’s price down 63 percent over the last five years, it can pick up Liffe at a discount at what it may view as an inflection point in the derivatives business. (There is a distinct possibility that ICE will find a way to spin off some or all of those individual markets – the Paris Bourse, say – via another sale, an IPO or a management-led buyout.)
The merger simply sets the seal on the dramatic transformation of trading platforms over the last 25 years or so. Trading these days is about technology, not physical trading floors. It’s about financial futures, options and other kinds of derivatives, not plain vanilla stocks. It’s about global institutions, not individuals. Increasingly, it is about an exchange being simply the place where organizations can put trading algorithms and high-frequency trading programs to work, not the place where they execute long-term shifts in investment strategy. And it’s about exchanges as efficient and profit-maximizing institutions, rather than as utilities that exist primarily to facilitate the transfer of securities from one investor to another.
Welcome to the 21st century.