The proposed acquisition of the New York Stock Exchange (NYSE) by the Atlanta-based InterContinental Exchange (ICE) at first blush appears to create a national exchange with broad reach, ensuring Wall Street's dominance in the financial world. But while the financial exchange supermarket that the two would create would make life easier for traders, it doesn't make much sense for investors, especially for ICE investors who will plunk down a sizable premium for the $8.2 billion acquisition.
No, today's deal is more about running the Big Board through the chopping block. It's sad to say, but the NYSE is worth much more sliced up than it's worth as a whole. ICE is most likely going to keep the NYSE's European derivatives business, NYSE Liffe, and jettison the rest in a combination of sales and spin offs, including the iconic "floor" of the exchange, to the highest bidder.
The NYSE (NYX) has had a "For Sale" sign on its door for a very long time. Duncan Niederauer, the chief executive of the NYSE, had been trying to cook up some sort of deal to sell the company and cash in almost since his first day on the job. If it wasn't for the market tumult of 2008, he would have probably sealed the deal by now. But it wasn't just the markets that were against him. So was Washington, and to a certain extent, Wall Street.
His plan to sell the iconic NYSE outright to Germany's Deutsche Borse last year would have created a $10 billion transatlantic trading titan. But European regulators balked at such an ambitious deal. Not for the equity trading part of the deal, but because it would give the combined company a virtual monopoly in the European derivatives space. While that might seem like an esoteric part of the deal, it was actually the entire point of it. At the time, fees from derivatives trading comprised a third of the NYSE's total net revenue and 40% of its profits. Much of that came from its NYSE's Liffe derivatives platform based in Europe. Unlike with equities, where margins have eroded over the years due to new entrants and dark pools, derivatives still had a bit of protection from new upstarts. Indeed, Liffe's only real competition in Europe was Eurex, which was half-owned by Deutsche Borse.
Meshing Liffe and Eurex together would have been a gold mine as it would have given the combined company almost total dominance in trading and clearing European derivatives. Keenly sensing that such a deal would never pass regulatory muster in Europe, the Nasdaq (NDAQ) and ICE (IWEB) proposed a joint takeover deal for the NYSE. The Nasdaq would get the NYSE's equity trading and listing business and ICE would get the NYSE's derivatives business. Niederauer wouldn't even talk with the American interlopers, though, hoping to seal the carefully crafted deal he had put together with Deutsche Borse.