Traverse City Record-Eagle

Business

December 21, 2012

A sell order for the NYSE

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NYSE — NEW YORK (AP) — The Big Board just isn't so big anymore.

In a deal that highlights the dwindling stature of what was once a centerpiece of capitalism, the New York Stock Exchange is being sold to a little-known rival for $8 billion — $3 billion less than it would have fetched in a proposed takeover just last year.

The buyer is IntercontinentalExchange, a 12-year-old exchange headquartered in Atlanta that deals in investing contracts known as futures.

Intercontinental Exchange, known as ICE, said Thursday that little would change for the trading floor at the corner of Wall and Broad streets, in Manhattan's financial district.

But 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. But today most trading doesn't require face-to-face meeting at all. It's 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, that offered 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," said Angel, 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 an $11 billion bid to buy NYSE Euronext. But 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.

Its stated mission was to transform the energy futures market by providing more transparency. The company has expanded through acquisitions during the last decade and went public — on thein November 2005.

Analysts forecast that ICE's revenue will reach $1.4 billion this year, more than double the $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," said ICE Chairman and CEO Jeffrey Sprecher.

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 $33.12 in cash, roughly a quarter-share of ICE, or a combination of $11.27 in cash and roughly one-sixth of a share of ICE.

NYSE's stock jumped $8.20, or 34 percent, to $32.25 in heavy trading shortly after the market opened. ICE's stock closed up $1.79, or 1.4 percent, at $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's expected to close in the second half of next year.

Caldwell, of Caldwell Securities, said that this combination of companies and the pressure of ever-declining fees will likely lead to further mergers in the exchange business.

"The whole theme in the exchange space is consolidation into bigger entities," he said. "They have to get their costs down because they are getting squeezed to nothing." Peter Costa, President of Empire Executions Inc., a boutique trading firm on the floor of the NYSE, and a governor with the New York Stock Exchange, said that both companies knew the value of the NYSE brand and would try to preserve it.

"The trading floor, while iconic, may seem to be an anachronism in this high-speed world of electronic this and electronic that, but it still survives because the customers that use the trading floor still see the added value of having some human intervention," Costa said in an email.

Costa, also an NYSE stockholder, said while that the premium that ICE was paying was not as high as he would have liked, it was "still fairly generous."

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