Will the NYSE Become the Market Leader in U.S. Equity Options?

Shares of exchanges jumped yesterday following the announced deal between TMX Group and the London Stock Exchange and the confirmation of advanced merger discussions between NYSE Euronext and Deutsche Borse.

But despite yesterday’s gains, remember that the exchanges’ stock prices have been under much pressure over the past few years. Look at how shares of the major U.S. exchanges have performed over the past 3 years or so.

Exchange Stocks Since December 31, 2007

  • NYSE Euronext (NYX) down 57%
  • CME Group (CME) down 55%
  • NASDAQ OMX (NDAQ) down 45%
  • Intercontinental Exchange (ICE) down 34%

(Note: Even the CBOE (CBOE) is down 21% since its much hyped-about IPO back in June of last year.)

So why the steep declines? That’s in large part to dwindling market share amid increased competition from electronic marketplaces and new exchanges. Our Bob Pisani has noted that there are over 50 trading venues today (a whole lot more than a mere 5-10 years ago), involving equities and futures exchanges and other alternative trading systems (electronic communication networks, dark pools, etc.). For more, check out complete coverage from last year’s exclusive Man vs. Machine series.

As one example, look what has happened to the NYSE’s market share in equity trading volumes of NYSE-listed companies in recent years. Its market share has been nearly halved in under four years.

  • July 2007: 61%
  • July 2008: 43%
  • July 2009: 36%
  • July 2010: 37%
  • February 2011: 33%

Source: BATS, Sandler O’Neill

Those market share challenges have forced the old guard of exchanges (and not just the NYSE) to consolidate, make global alliances, and diversify to broaden their revenue stream. For example, the NYSE merged with Euronext and acquired the American Stock Exchange over the past few years to gain a greater global presence and expand more into other products like options. Similarly, the NASDAQ also merged with European exchange group OMX and acquired the Philadelphia and Boston Stock Exchanges here in the U.S.

Likewise, the possible NYSE Euronext-Deutsche Borse merger could help the NYSE become the market leader in U.S. equity options. With the potential combination of the NYSE’s existing options platforms and the Deutsche Borse-owned International Securities Exchange, the deal may give the new company an over 40% market share in the U.S. equity options business – easily surpassing the current market leader NASDAQ OMX.

Current Equity Options Market Share

  • NASDAQ OMX (Nasdaq/PHLX) 30%
  • NYSE Euronext (Arca/Amex) 25%
  • CBOE 21%
  • ISE 18%

Source: Options Clearing Corporation

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