ICE-NYX May Help Consolidate U.S. Market

Terry Flanagan

After a decade or so of increasing fragmentation in U.S. equity markets, some observers say IntercontinentalExchange’s imminent acquisition of NYSE Euronext may act as a catalyst to turn the tide.

“This merger is hopeful because (ICE Chief Executive Jeff) Sprecher might be more effective in dealing with Washington in developing a more holistic framework for cash equities trading than 65 markets competing on fees,” said Thomas Caldwell, founder and chairman of Toronto-based Caldwell Investment Management, which invests in exchange operators. “I’m hopeful he will bring about a greater coherence.”

Tom Caldwell, Caldwell Investment Management

Tom Caldwell, Caldwell Investment Management

Atlanta-based ICE, which operates derivative exchanges and clearinghouses, said in December 2012 it would buy NYSE Euronext, which is best-known for its iconic New York Stock Exchange. The deal, valued at about $11 billion, is expected to close on Wednesday.

At an derivatives-industry event last week, Sprecher said U.S. equities are the greatest capital market in the world. He indicated he wants to move the NYSE, and by extension the U.S. stock-exchange sector, beyond just a venue to execute a quick trade.

“The cash-equities business in the U.S. seems to be about trading, in most peoples’ minds,” Sprecher said Nov. 6 at the Futures Industry Association conference in Chicago. “But the reality is, people want long-term investing and financing relationships. That’s not about the trade.”

As head of what will be the third-largest global exchange operator behind Hong Kong Exchanges and Clearing and CME Group, Sprecher will battle the general perception that exchanges are just systems, networks, and matching engines designed to enable secondary-market trading. “I hope NYSE can take a leadership role,” he said. “I get paid to solve problems. There is a lot to be done to improve U.S. equity markets.”

Rulesets such as Regulation National Market Structure in 2007 opened up the equity trade-matching business to new players, and technological advances have helped those alternative trading systems and upstart exchanges wrest market share from the incumbents, NYSE and Nasdaq. “It was the intent of regulators to cut down the market share of the NYSE,” Caldwell said. “The market draw of NYSE is no longer what it was.”

Sprecher, who founded ICE in 2000 and built the company through acquisitions and organically to a market capitalization of almost $15 billion, may have the force of personality needed to tilt the balance of power back to the larger players.

“Sprecher is a very aggressive guy,” Caldwell said. “He will do his best to campaign for a more coherent market structure and possibly an enhancement of the operating framework of the major exchanges, NYSE and Nasdaq. If Sprecher is not successful in changing the environment of cash equities trading in America, NYSE could be up for sale in a few years again.”

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