Trader Talk

What Really Sunk NYSE Deal?


NYSE Euronext CEO Duncan Niederauer's comment in Davos that there was only a "glimmer of hope" on the NYSE Euronext-Deutsche Boerse deal is a blunt recognition that the deal was sunk by a combination of a euro crisis that has engulfed the continent, and furious lobbying by euro banks whose derivatives business might be hurt by the deal.

NYSE trader
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The NYSE has focused its lobbying efforts on Germany, trying to convince them that the deal would make Frankfurt the global capital of capital raising and that it would afford the Germans — and the rest of Europe — more regulatory control over the industry.

Both are plausible — indeed powerful — arguments, and may have prevailed in normal times.

But these are not normal times.

In normal times, both entities could have likely counted on support from Germany's Angela Merkel. But something happened between now and when the deal was inked last February: the euro crisis.

Merkel is simply too overwhelmed to make this much of a focus.

Other allies are also out: Christine Lagarde, French Finance Minister when the deal was signed, was a likely supporter but is now IMF head.

What sunk the deal? Besides the euro crisis, blame the banks. The EU competition commissioner insisted that the combined entity would have a monopoly on derivative trading and refused to acknowledge that over the counter trading (OTC) is a huge part of the business.

Who does OTC trading of derivatives? Banks. It's an opaque business with little transparency that's very profitable. The merger is a direct threat to their business. They lobbied furiously to stop this deal.

What's next? Transnational stock exchange mergers look dead. First LSE-Toronto fails, then Australia-Singapore. Now NYSE-DB.

Instead look for more modest hookups. A reset from megamergers to joint ventures and partnerships in technology services and clearing, for example. NYSE needs more clearing capabilities. LCH in London, which is 9 percent owned by NYSE, is in play now.

One big problem: who wants to be in the stock business? It's not very appealing, what with the lousy margins and appalling lack of volume.

That's why CME and ICE are not as appealing merger partners as many keep thinking. It's likely neither one wants the stock business. CME would keep LIFFE (the derivatives business), and sell off everything else. Huh? Some merger that would be.

One last point: don't look for a vote count. This is the EU after all. Officially 27 EU commissioners will vote on the deal in early February, where a majority vote is needed. But these votes almost invariably proceed on consensus and no vote is ever announced.

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