Reuters is reporting that the board of NYSE Euronext will hold a meeting on Sunday to discuss the potential merger with Deutsche Börse AG.
Details of what the NYSE Euronext board might discuss or what it might vote on were unclear. The two companies declined to comment.
The two exchange owners first confirmed that they were in advanced talks about combining on Wednesday, arguing that a marriage would result in “approximately €300 million in cost synergies, principally from economies of scale in information technology, clearing operations, market operations and corporate center functions.”
The potential deal (along with the announced offer by the London Stock Exchange for TMX Group) has generated some inspired commentary about the broader impact of exchange mergers on the markets and economy. Since we’re showing up late to this party, we’ve mooched shamelessly rounded up some of best entries at the end of this post.
But first we want to highlight and comment on an article on Thursday by Jason Zweig of the WSJ, who offers a bit of historical perspective (HT Josh Brown):
News of the possible merger between NYSE Euronext and Deutsche Börse AG leaves no doubt that for stock exchanges, the future isn’t in exchanging stocks.
The big exchanges make much of their money nowadays by providing market data to traders who move at blinding speed—not just in stocks but, increasingly, in futures, options and other “derivatives.”
By 1873, brokers were leasing private telegraph lines to provide customers—and, presumably, themselves—with faster information and trading. Between 1889 and 1892, according to research by economic historian Alexander J. Field, the New York exchange denied telegraph access to any outsiders who didn’t route orders through a network owned by the exchange. By 1913, Western Union was paying the NYSE $100,000 annually, more than $2 million in today’s money, to collect and disseminate data.
These were the direct ancestors of the “co-location” and “direct data feeds” that have enabled high-frequency traders to get first crack at market prices on today’s stock exchanges. …
In short, exchanges have long been in the business of attempting to control information, enabling some traders to execute orders faster than others.
That high-frequency traders, institutional investors and hedge funds get quicker access to financial data than do smaller investors is a familiar gripe — and it’s also true.
Of course, the broad democratisation of financial information in the last few years has yielded some progress. And to give just one timely example, it was less than three years ago that if you wanted real time quotes from the NYSE, you had to either call your broker or own a terminal. The introduction of NYSE Realtime Reference Prices changed that, and since then the exchange has charged internet service providers less and less for the privilege of giving readers these instantaneous quotes for free.
Kid Dynamite noted last June that the discrepancy between when Wall Street receives data and when retail players get it has shrunk from twenty minutes just fifteen years ago to milliseconds now.
Then again, milliseconds are all a machine needs to get ahead, and the rise of high-frequency trading means that closing the gap in time — even one measured in such tiny increments — won’t happen anytime soon.
To be honest, we don’t know to what extent these mergers would intensify this discrepancy. Obviously they wouldn’t rectify it, either, but for now it seems there just isn’t anything that smaller investors can (afford to) do to level the proverbial playing field with their robot competitors.
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Exchange mash-up round-up
– Colin Barr notes that the merger “will only intensify problems that skeptics have been railing about for years”, specifically that “increasingly battle one another to serve the biggest companies — and to bring in low-margin trading volume that comes as often as not from computers seeking out freebies like trading rebates.”
– Stephen Gandel agrees, writing: “it is likely that the past decade of evolution into electronic trading and more importantly high frequency trading have made the NYSE and other large exchanges inhospitable places for small-cap companies. If you think computerized trading adds volatility to Citigroup, then is sure to make the chart of a recent IPO look like a punk rock hairdo. As a result, you might see more companies, like Facebook, decide to sit out the public markets as long as possible, and that’s not a good thing.”
– Deal Journal posts a number of analyst reactions, including:
“We believe the regulatory process could cause some headline risks and the process could take an extended period of time given that the entity would then be the single dominant futures platform in Europe. However, we would expect the exchanges to make the argument to the European regulators that this is a model pursued in the U.S. right now and make a similar argument that the CME had success with its CBOT deal.” –Keefe, Bruyette & Woods’ Alexander
– Bloomberg explains why this is just the beginning, as more exchanges will seek to capture (through acquisitions) a bigger share of high-margin derivatives trading:
While the combinations will create markets that control trading in companies worth more than $20 trillion, or about 36 percent of the world’s stock-market value, what may prove more lucrative is ownership of growing venues for trading options, futures and derivatives whose profit margins are 57 percent more than equities at NYSE Euronext.
Profit growth for exchanges is being driven by derivatives, after increased regulation reduced operating margins for stocks at NYSE Euronext to 35 percent, compared with 55 percent for the contracts whose value is linked to an underlying asset.
Related link:
‘Someone will always have the data first’ – FT Alphaville