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What's REALLY Driving NYSE Story

Fire everyone! Why cost cutting is the driving force in the NYSE story — no matter who wins.

Three more points on the Nasdaq/ICE bid for NYSE (see my two previous notes for more).

1) Will the Deutsche Boerse make a counterbid? It seems likely they will, but based on discussions with market participants it seems that their ability to make a strong counterbid ($42.50 or more — what Nasdaq/ICE made) is also very limited. They need 75 percent shareholder approval; that is a big hurdle when you start upping the bid into uncomfortable territory.

My bet is that Nasdaq /ICE made a bid they thought would cause a lot of discomfort at Deutsche Boerse and was unlikely to be exactly matched.

No matter: Deutsche Boerse will likely counterbid, they may not bid all the way to $42.50 but they should come close; even if they are short they will argue that the overall synergies of the deal make far more sense than with Nasdaq/ICE.

I don't mean cost synergies, I mean the growth opportunities and the way the companies would operate together.

As for cost synergies, Deutsche Boerse is likely to justify a higher bid by arguing that they can get even more synergies out of the deal than they originally indicated — they had previously talked about $400 million, versus the Nasdaq/ICE claim that they can get $740 million in synergies.

Where will they find these additional cost synergies?

Once again, there will be rumors that even the Deutsche Boerse deal may involve altering the floor, perhaps going to an electronic trading model that I discussed in my prior note. This would abolish the Designated Market Maker model and eliminate the supporting staff that supports floor activities.

2) Regulatory approval. Try to think about this from the Nasdaq's perspective. They seem to be making the following bet:

a) regulators may prefer a Nasdaq bid because it keeps the NYSE in U.S. hands, and

b) Combining the two companies would give a roughly 50 percent market share in stocks that they list; this is a desirable outcome from a regulatory point of view. The SEC is clearly concerned about market fragmentation. Never mind that it was the SEC itself that started the market fragmentation problem over a decade ago when it began encouraging competition to break up the NYSE/Nasdaq monopoly. The Flash Crash has woken them up to the problems of market fragmentation; this is one way to put Humpty-Dumpty back together again without getting too involved.

3) Can Nasdaq really make stock trading more profitable? Nasdaq chief Greifeld implies he can, but how? The only way, aside from cost cutting, would be if they assume they had the strongest franchise out there. That might enable them to raise prices. I find this hard to believe, given how easy it is to start a competing exchange.

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