Only a decade ago it was not entirely hubris for the head of the New York Stock Exchange to call himself the CEO of capitalism.
Issuance and trading of equities was the most lucrative and celebrated element of the American financial system and the NYSE had been at the heart of it for over 200 years. Last Wednesday the firm that owns the exchange, NYSE Euronext, became part of the Intercontinental Exchange (ICE), a 13-year-old outfit based in Atlanta that has capitalized on the transition from face-to-face to electronic trading of energy futures.
Making money running a stock exchange is getting harder, thanks chiefly to increased competition. The NYSE once had a monopoly on the trading of shares in firms that listed on it, but regulators did away with that in 2000. Even so, a decade ago it still had a roughly 80 percent share in the public trading of American equities, according to Bernstein Research; now it accounts for less than 25 percent.
Before ICE made its takeover bid 11 months ago, NYSE Euronext's share price was languishing at a quarter of its peak. Although new listings in America are at their highest level in a decade after a long decline, the competition means that the NYSE will struggle to capitalize on them.
Adding to the indignity of the NYSE's lost independence is the broadly held belief that ICE bought it not for the NYSE itself but for another exchange it owns, LIFFE, which has a large share of the market in European derivative contracts. It also profits from a license to issue derivatives tied to MSCI share indexes, and may soon offer products tied to LIBOR, a benchmark interest rate that is to be administered by another division of ICE.
Trading in energy futures is lucrative
Derivatives in general and energy futures in particular have fueled ICE's rapid growth. They tend to be proprietary to the exchange on which they are traded. That provides some protection from competition, although if transaction costs on one exchange become too high, customers can simply switch to similar contracts traded on another. For the moment, at any rate, ICE's return on equity, at 15 percent, is double that of NYSE Euronext.
What happens now to NYSE Euronext's equity business in America and Europe, and to the iconic, heavily guarded NYSE headquarters on the corner of Wall and Broad streets in Manhattan, is open to speculation. The building, whose once-crowded trading floors reflected the alternating energy and lethargy of America's economy, has been reduced to a symbol of capitalism for cable-news networks and for tourists.
The NYSE's nostalgic preservation of a room packed with screaming traders may have contributed to its decline; trading is now almost entirely computerized. But it had begun the long process of automation in the 1980s and in 2006 went public through the acquisition of a small electronic exchange with the intention of sprucing up its technology. It merged with Euronext in 2007 to expand its range of products and its geographical reach. None of this, however, proved enough to overcome the wave of competition.
Many equity markets are struggling to identify a profitable business model. "Dark pools" keep secret the identity of buyers and sellers, the volume they wish to trade and the prices they are offering, to prevent others from benefiting from that information.
Some markets try to attract customers by paying investment firms to award them their orders. The intention is to generate greater volumes of data that can then be sold back to traders who find the information useful.
Jeffrey Sprecher, ICE's boss, seems to question the merits not just of the NYSE's current strategy, but of the entire system of equity-trading in America. The existing setup, he says, takes advantage of people who have to sell, forcing them to pay "usury rates" as a result of uneven access to market data.
Intermediaries and exchanges that should have a "duty of care" are instead incentivized "to take advantage of people." That, he added, "is fundamentally wrong."
If he can come up with a plan to fix all that, he will be seen not as a usurper so much as a restorer.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.
