The Big Board is just not so big anymore.
In a deal that highlights the dwindling stature of what was once a centerpiece of capitalism, the New York Stock Exchange (NYSE) is being sold to a little-known rival for US$8 billion — US$3 billion less than it would have fetched in a proposed takeover last year.
The buyer is IntercontinentalExchange (ICE), a 12-year-old exchange headquartered in Atlanta, Georgia, that deals in investing contracts known as futures.
ICE said on Thursday that little would change for the trading floor at the corner of Wall and Broad streets in Manhattan’s financial district.
However, the clout of the two-centuries-old NYSE has gradually been eroded over decades by the relentless advance of technology and regulatory changes. Its importance today is mostly symbolic.
The NYSE dates to 1792, when 24 brokers and merchants traded stocks under a buttonwood tree on Wall Street. However, today most trading does not require face-to-face meeting at all. It is done on computers that match thousands of orders a second.
Three decades ago, the floor of the New York exchange was full of bustling traders. Today, one of its largest booths belongs to the cable news channel CNBC, which broadcasts there for most of the business day.
The introduction of negotiated, rather than fixed, commissions for securities transactions in May 1975 marked the start of a gradual decline in brokerage fees for traditional stock trading.
It also gave rise to so-called discount brokerages, like Charles Schwab Corp, that offer to trade for customers at lower rates.
“The cash equities business in America has effectively been obliterated,” said Thomas Caldwell, chairman of Caldwell Securities in Toronto and a shareholder in the New York exchange’s parent company, NYSE Euronext.
He said that the jewel of the deal is not the New York exchange, but Liffe, a futures exchange founded in London, further underlining the growing importance of the futures markets.
While brokerage fees have declined, futures exchanges have retained profit margins, said James Angel, an associate professor in finance and an expert on stock exchanges at Georgetown University’s McDonough School of Business.
Futures contracts are written by exchanges and must be bought and sold in the same place — as opposed to stocks, which can be bought and sold on any exchange, Angel said. That gives futures exchanges more pricing power.
Stock trading is a “dog-eat-dog business where the profit margin per share is measured not in pennies, not in tenths of pennies, but in hundredths of pennies,” Angel said, who also sits on the board of Direct Edge, a smaller stock exchange.
NYSE Euronext was formed in a 2007 merger when NYSE Group, parent company of the exchange, got together with Euronext, which owned stock exchanges in Europe.
It has been looking for a partner. Last year, ICE and NASDAQ OMX Group Inc, which competes with the NYSE for stock listings, made a US$11 billion bid to buy NYSE Euronext. However, that deal fell apart after regulators raised antitrust concerns.
Deutsche Boerse AG, a German company, made a bid for NYSE Euronext, but that was scuttled by European regulators.
ICE was established in May 2000. Its founding shareholders represented some of the world’s largest energy companies and financial institutions, according to the company’s most recent annual report.
Analysts forecast that ICE’s revenue will reach US$1.4 billion this year, more than double the US$574 million it reported in 2007.
“We believe the combined company will be better positioned to compete and serve customers across a broad range of asset classes by uniting our global brands, expertise and infrastructure,” ICE chairman and chief executive officer Jeffrey Sprecher said.
Sprecher will keep his positions. Four members of the NYSE board will be added to ICE’s board, expanding it to 15 members.
For each share of NYSE Euronext stock that they own, shareholders can choose either US$33.12 in cash, roughly a quarter-share of ICE, or a combination of US$11.27 in cash and roughly one-sixth of a share of ICE.
NYSE’s stock jumped US$8.20, or 34 percent, to US$32.25 in heavy trading shortly after the market opened. ICE’s stock closed up US$1.79, or 1.4 percent, at US$130.1 after falling at the open of trading.
ICE plans to pay for the cash part of the acquisition with a combination of cash and existing debt. It added that the deal will help it cut costs and should increase its earnings more than 15 percent in the first year after the deal closes.
The deal has been approved by the boards of both companies, but still needs the approvals by regulators and shareholders of both companies. It is expected to close in the second half of next year.