News of the IntercontinentalExchange’s (ICE’s) $8.2 billion cash-and-shares bid for the venerable New York Stock Exchange (NYSE) ends a year of speculation over consolidation and the future of the landmark equities operation at Broad and Wall Streets in Lower Manhattan.
Earlier this week, at a meeting inside the building directly south of NYSE Euronext's US head offices, Emmanuel Carjat, manager director of infrastructure provider TMX Atrium, spoke about the outlook for 2013. He suggested that if equities transactions were to continue their slump into 2013, some kind of consolidation would, as a basic matter of operating costs, become imperative—despite the failed attempts at it this year.
Carjat might be clairvoyant, or just good at reading tea leaves. With the announcement of IntercontinentalExchange's acquisition of NYSE Euronext just hours ago, he seems only to have underestimated the exchange operators' urgency.
Apparently the NYSE Euronext–Deutsche Börse debacle, and this year's slipping volumes, were enough.
Regulators or competing exchanges could still attempt to block the deal, but the match this time seems fairly straightforward, and a good fit in terms of the exchange operators’ innate strengths as well as antitrust concerns. ICE has been described as an "upstart market operator,” but considering the Atlanta-based firm's growth since its launch in 2000, that is selling it short. But the sentiment is important as it seeks to get the deal pushed through and for now, "upstart" ICE is likely quite fine with CEO Jeffery Sprecher.
In the meantime, a few technology-related thoughts come to mind. If it wasn't already clear, equities is now second, if not third, to commodities and fixed-income derivatives trading in terms of the markets' forward outlook. Technology is not entirely to blame, but it has played a part—think high-frequency trading (HFT) sharks and well-publicized systems errors like those at Knight Capital—in chasing away retail and institutional investors alike. That, Carjat points out, is a problem no matter who the ultimate owner of the NYSE is.
Meanwhile, the value attached to expertise in derivatives, and particularly swaps, has ballooned during the year's creeping implementation of Dodd–Frank. From swaps execution, to post-trade processing and clearing in both established and emerging markets, ICE's Creditex and Credit Clear have been right out in front, and the firm has made few bones about registering as and building out a swap execution facility (SEF), where others have been more hesitant.
Finally ICE's original specialty, facilitating trading and hedging in commodities futures and options, has proven highly sustainable.
Put all that together—a potentially undervalued NYSE Euronext, regulatory capital, a solid foundation, and the drive to become truly "intercontinental"—and the justification for having a try at this deal now makes quite a bit of sense. Assuming the deal is approved, it will be fascinating to see how, if at all, the firms integrate their platforms and technology strategies.
Along those lines, two questions stand out. First, how will ICE's clearing, and the cleaing landscape more broadly, evolve? Remember that NYSE Liffe—the London derivatives market said to be a coveted asset in the ICE takeover bid—announced in June it would part ways with LCH.Clearnet in 2013 to build its own operation. A separate announcement today brought some early clarity, saying Liffe's execution and clearing will now be handled through ICE Clear Europe, with the combined operation set to ramp up rate swaps clearing.
And finally, what does this portend for merger and acquisition (M&A) activity in 2013? One can only hope it is a clear signal that the market sees good things on the horizon.
In the wake of so many botched, blocked and rebuffed mergers in the shifting exchange landscape, this one seems, at least for now, to have gotten it right.
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