Behind the Scenes, Two Very Different Plans for NYSE
When it comes to keeping the New York Stock Exchange’s trading floor open, Robert Greifeld makes a very unlikely savior.
As the chief executive of the all-electronic Nasdaq exchange, Mr. Greifeld has questioned whether a physical place where human beings come together to buy and sell stocks is even necessary. He has dismissed the 219-year-old capitalist symbol of the New York exchange as “a stage prop” that ought to be taken apart “board by board.”
Now, though, with Nasdaq and the Intercontinental-Exchange in a fierce fight with the Deutsche Börse to buy the Big Board, and its parent company, NYSE Euronext , Mr. Greifeld insists that he will not only keep the floor open but reverse its long decline.
Although it might seem largely symbolic — only about 1,200 traders remain on the floor, down from more than 2,500 a decade and a half ago — both bidders are promising to keep it open, a rare point of agreement and a nod to the high-stakes public relations battle now under way.
Behind the scenes, however, starkly different strategic visions of the future of stock exchanges are being proposed. The tussle between the exchanges is a question about which model is going to compete most successfully in a global marketplace: one that straddles continents and product lines or one that stays local and focused.
“The question is, what is the exchange of the future?” said Richard Repetto, an analyst at Sandler O’Neill, an investment banking and brokerage firm. “Both want to compete globally but Nasdaq is saying, hey, we think the best way to compete globally is to stay as narrowly focused as possible. NYSE is saying, hey, you need to be diversified to compete and have global capabilities.”
The strategy of the Deutsche Börse calls for the combined company to trade stocks as well as higher-margin, faster-growing derivatives in both Europe and the United States.
"It is a bigger international play,” said Patrick J. Healy, chief executive of the Issuer Advisory Group.
Nasdaq’s vision is built on dominating stock trading in the United States. It would have some international equity trading, like its current OMX operations in the Nordic and Baltic countries, as well NYSE Euronext exchanges in European centers like Paris and Amsterdam.
But the merger would make the combined business the home of all the companies listed in the United States, responsible for 45 percent to 50 percent of domestic trading volume. Issuers, including overseas companies, might prefer a bigger, unified American capital market compared with the fragmented one now.
On Thursday the fate of the Big Board is likely to take center stage at the annual shareholder meeting of NYSE Euronext in Manhattan. But the final outcome may be decided only by a shareholder vote scheduled for July.
The deal with the Deutsche Börse — which went mainly electronic more than a decade ago and has only about 120 traders on its floor in Frankfurt — would give NYSE Euronext a much bigger share of the market for exchange-based derivatives trading in Europe, including interest rate derivatives as well as NYSE Euronext’s 27 percent share of cash stock market trading in the United States.
Under the Nasdaq-ICE bid, NYSE Euronext would be split into two. The NYSE Euronext’s stock-trading operations, including the NYSE floor, would go to Nasdaq, while ICE would pick up most of the derivatives businesses in the United States and Europe.
NYSE’s board has twice rebuffed the Nasdaq-ICE bid, even though Mr. Greifeld sweetened his offer last week with firmer bank financing and an offer to pay a $350 million break-up fee to NYSE Euronext if regulators veto the deal.
The NYSE Euronext board said it still prefers to merge with the Deutsche Börse, because that deal would keep the company intact, and emphasize the global cross-product strategy, while they argue an Nasdaq-ICE combination would run afoul of antitrust rules.
The Nasdaq-ICE bid is also a bet on the superiority of purely electronic trading. From its headquarters in Times Square, Nasdaq has done more than anyone else to draw business away and diminish the exchange, and in the shift to electronic trading the Big Board itself adopted ever more automation and set up its own electronic-only market, called Arca.
Even on the floor of the exchange itself, most trading is conducted electronically, with the floor brokers and market makers usually intervening manually only at the busiest times or when the computers go haywire, as in last May’s flash crash.
The Nasdaq-ICE bid is worth more upfront — offering $42.84 a share vs. Deutsche Börse’s $37.76, based on their current stock prices. It also foresees greater cost savings: Nasdaq and ICE together expect to save about $740 million in the next three years, a figure driven by eliminating duplicate back-end technologies and cutting jobs. Nasdaq also plans to close either NYSE’s data center or its own data complex, both of which are in New Jersey.
By contrast, the NYSE Euronext-Deutsche Börse merger initially called for $400 million in cost savings, although Duncan L. Niederauer, NYSE Euronext chief executive, raised this estimate by another $150 million on Monday.
Mr. Greifeld said the Deutsche Börse proposal would create an unwieldy “financial supermarket.” But by focusing on equities in the United States, Nasdaq might be cutting itself off from faster growth areas overseas and higher-margin derivatives trading.
It is better to be diverse from a geographic point of view and a product point of view,” said Justin Schack, an analyst at Rosenblatt Securities, who said the Deutsche Börse option is preferable. “If you are going to be in the cash equities business, you had better also be in the higher-margin, faster-growing derivatives business, and Nasdaq will still lack a significant presence there.”
Nasdaq may also face headwinds from antitrust regulators worried about the combined company’s outsized market share. On the other hand, working in its favor is the political issue of a foreign exchange taking over what many people view as more than just another company.
“Do people want a German flag flying over Wall Street?” said Sang Lee of the Aite Group, a financial services consulting company.
At the same time, the prospect of the New York Stock Exchange falling into Mr. Greifeld’s care has left many people in the industry asking whether the venerable floor will survive, or whether after more than two centuries what is arguably the most famous trading venue in the world will finally be closed.
The Big Board’s management insists the human touch, however limited, still plays a crucial role. The traders on the floor can listen for rumors about big deals, and sound out the market in ways a computer cannot, they argue.
“There is manual intervention in special situations where there is stress, or volatility, at the open or close of trading or public offerings,” said Joseph M. Mecane, administrative officer for United States markets at NYSE Euronext.
Rather than the trading, the real value of the floor may instead be its historical symbolism — the biggest companies pay $500,000 a year just to list their shares on the Big Board and have their executives seen on television ringing the opening bell, more than they pay on Nasdaq where the top fee is $100,000.
It is what Mr. Schack calls the premium of being “the soundstage of American capitalism” — a premium that whoever wins the takeover battle will want to preserve.
Mr. Greifeld said he recognizes “the ceremonial value to listed companies” of the exchange’s historic floor.
“We have always recognized that,” he said in an interview. “We will want to keep that aspect of it.”
But he said NYSE Euronext’s hybrid man-and-machine approach has failed. Any future for the floor will have to recognize the reality that the electronic market has won.
“It is over,” he said. “The trading that existed down the centuries has died. We have an electronic market today. It is the present. It is the future.”
Still, Mr. Greifeld said he wants to persuade the stock traders who operate the computers now scattered around the world to come back to the floor, with its 74-foot ceiling and Georgia marble walls.
“When you look at the floor today you can see it is certainly underutilized,” he said.
“There is nobody there during the day. The floor is desolate. It is embarrassing how empty it is. The floor that existed 10 years ago, that has been essentially dismantled. The result is you have an empty cavernous building. Now the question is, How do you fill it back up?”