Saturday, June 3, 2006

Behind the Big Board's Big Bet

News Analysis
June 3, 2006

Business Week Online

Behind the Big Board's Big Bet

The NYSE-Euronext hookup may bring drastic changes to the way stocks are traded. Here's what you need to know

The Big Board is looking to get a lot bigger. On June 2, New York Stock Exchange owner NYSE Group (NYX ) and European exchange operator Euronext unveiled a deal to create the world's biggest securities marketplace, a trans-Atlantic behemoth valued at $20 billion. The merger could have implications for investors and publicly traded companies worldwide, provided it can leap through international regulatory hurdles.

NYSE Euronext, as the combined exchange would be known, would offer stock trading through exchanges in New York, Paris, Lisbon, Brussels, and Amsterdam, as well as futures and options trading through the electronic Euronext.liffe exchange in London. The deal also gives the NYSE a foundation in the profitable business of derivatives (see BW Online, 6/02/06, "NYSE, Euronext Detail Merger Plans").

Current NYSE Chief Executive John Thain will remain in that position with the combined company, while Euronext Chief Executive Jean-Francois Théodore becomes deputy CEO and head of European operations. "We believe that our combined listing firepower will be very effective in competing with the big listing venues around the world for the big global IPOs," Thain said at a June 2 press conference in Paris, broadcast via the Web.

A wave of consolidation is making securities marketplaces increasingly global and electronic-based. "People think of exchanges as kind of exotic creatures, but to be honest this is no different from something like eBay (EBAY )," says David Bertocchi, fund manager at Baring Asset Management in London. "eBay works in many national jurisdictions and does it off a single platform. There's no reason why stock exchanges can't do the same."

Still, the transaction promises to be complicated. What does it mean for average investors? For traders? Will there be a longer trading day? Here, we've tried to answer some of the key questions:

What does the deal mean for ordinary investors?
They won't see significant changes at first. But potentially, investors could see trading costs fall as the combined company passes along the economies of scale. NYSE Euronext will be converting six trading platforms into two, one for derivatives and one for cash equities. "The cost benefits of doing that are substantial," Bertocchi says.

But lower costs might be just the beginning. U.S. and European investors would likely be able to trade seamlessly in their respective foreign markets, exchange watchers say. In theory, at least, someday investors from any country could readily trade any security listed on any exchange.

Wouldn't that require a longer trading day?
Probably. Trading hours for each of the exchanges will remain as they are for the time being, NYSE and Euronext executives said at the June 2 press conference. But NYSE's Thain called an expanded trading schedule "one of the things we will explore."

The NYSE currently opens for its regular trading session at 9:30 a.m. New York time and closes at 4 p.m., while the bourse in Paris starts trading at 3 a.m. New York time. Combined, that's a 13-hour trading day -- and it could get longer. "The arrow points toward 24/7, 365-day global trading, but that's almost futurism," says Clement Chambers, CEO of ADVFN, a British Web site that tracks the markets. After-hours trading is already available on the NYSE, but volume tends to be low.

What about the traders on the NYSE floor?
That's tricky. The NYSE-Euronext alliance accelerates the momentum for closing the trading floor as more and more trades are conducted electronically, several observers suggest. "They're going to be saying, 'Well, who needs a floor anymore?' " says James Angel, associate professor of finance at Georgetown University's McDonough School of Business.

The Big Board has already been going electronic in a big way. In 2005, the NYSE merged with electronic exchange Archipelago Holdings, and Euronext's platform is also all-electronic. In recent months, the NYSE has rolled out a computer-human "hybrid" system, which allows investors to choose whether to send their trades through specialists on the floor or through the NYSE's computers for instant matching (see BW Online, 3/6/06, "From Dinosaur to Dynamo").

The middlemen are more optimistic. Robert Fagenson, vice-chairman and CEO of Van der Moolen Specialists (VDM ), hopes the deal will give floor folks a bigger role in bourses where they were previously absent. "As small exchanges in Europe and throughout the world have gone to electronic platforms, the missing element has been a liquidity provider," Fagenson says. "That has held back the effectiveness of many markets around the world."

How will the merger affect companies that list on the exchanges?
Again, not much right off the bat. However, in the long run it could give foreign companies access to domestic investors without having to comply with cumbersome U.S. regulatory requirements, such as Sarbanes-Oxley.

Listed companies would also stand to benefit from a larger pool of liquidity. "They want it to be as easy and cost-effective for investors around the world to buy their stocks as possible, so I think both issuers and investors will look positively on this consolidation trend," says Bill Cline, managing director for consulting firm Accenture's global capital-markets practice.

There's also speculation that NYSE Euronext could offer two-for-one deals to prospective issuers. "If you're listed in the NYSE, you'll get a break on your Euronext fees, and vice versa," Georgetown's Angel says. "I would expect to see something like that."

The good news for European companies is that costly U.S. regulations probably won't creep over to them, at least not as a result of this transaction. "There is no risk of Euronext-only listed companies having [to become] subject to Sarbanes-Oxley," the NYSE's Thain said at the press conference.

What's next?
The NYSE and Euronext need to get approval from their various regulatory agencies. Securities & Exchange Commission Chairman Christopher Cox reportedly said the SEC is in discussions with authorities in France and the Netherlands to work out a cooperative response to the proposed merger. "There are very fundamental regulatory, jurisdictional issues that would have to be worked out," says Mike Zuppone, chair of the securities practice group at law firm Paul, Hastings, Janofsky & Walker and a former SEC branch chief.

Meanwhile, expect consolidation to continue (see BW Online, 5/22/06, "The Battle for the Bourses"). On June 2, Germany's Deutsche Börse issued a statement reiterating its own bid for a combination with Euronext. Meanwhile, negotiations on a possible alliance between Euronext and Italy's Borsa Italiana are reportedly set to start next week. NASDAQ (NDAQ ) recently bought up a 25.1% stake in the London Stock Exchange, and the two bourses are said to have been in merger talks (see BW Online, 4/11/06, "Nasdaq Takes a Slice of the LSE").

Markets in Asia and the Pacific are the next likely deal candidates, observers say. But don't count on NYSE Euronext to announce a merger in that region anytime soon. "The focus will be on closing this transaction and on capturing the planned synergies," says Accenture's Cline.

In the long term, the U.S. may be following Europe's lead in transitioning beyond national securities exchanges. "Are we moving to a day where there will be the equivalent to a world market, or world markets, in a blue-chip list of securities traceable throughout the globe under common standards?" asks Joel Seligman, president of the University of Rochester and author of a book on securities regulation. "This is a step in that direction. But it's only a first step."

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