NYSE Moves Forward

Terry Flanagan

The operator of the New York Stock Exchange will forge ahead with its existing growth initiatives in the wake of its unsuccessful merger.

“We’re not sitting still waiting for the operating environment to improve,” said Duncan Niederauer, NYSE Euronext chief executive in a conference call with reporters. “We will look to grow the company through strategic M&A. There are a lot of opportunities in clearing and in our technology business.”

Global exchanges have been under increasing pressure in recent years as trading volume has declined and competition has increased. Many have looked toward alternative streams of revenue, including offering services and market data. NYSE perhaps has been the most successful in this regard. Its NYSE Technologies unit is estimated to be a billion dollar business, and accounts for as much as 20% of NYSE Euronext revenue.

Niederauer has also said that it would continue to look at smaller, bolt-on acquisitions going forward, including the London Metal Exchange, the world’s largest metal exchange, and LCH.Clearnet, one of Europe’s largest clearing houses.

That thinking comes as exchange executives have noted the increasing difficulty in getting large, cross-border mergers approved. With nearly all of the major exchange deals from the past 12 months scuttled, some due to regulation or lack of shareholder support, it appears likely that the days of the cross-border mega merger are numbered. Regulators have made it clear that they would put potential deals under the microscope and pay particular attention on the effects they would have on competitive balance.

“It is not as easy to get cross-border mergers done as it was a few years ago,” said Niederauer. “Looking back at 2011, much-anticipated consolidation was met with much unanticipated resistance.”

Although exchanges operate in a transaction-based business, NYSE’s ventures into other areas aside from matching trades has left it in a good position, despite lower trading volumes. Equities trading volume in the U.S. has averaged about 7 billion shares per day thus far in 2012. This is down from the 8.2 billion seen during the same period last year, which was in turn down from the 9.1 billion in early 2010. This has inevitably put the squeeze on market participants, particularly exchanges and broker-dealers.

“It’s hard to imagine for the situation to worsen,” said Neiderauer. “Most of our revenue is not transaction-related, as there are a lot of other opportunities. While the near-term operating environment is looking pretty muted, it’s hard to imagine these clouds of macro uncertainty won’t start to part pretty soon.”

Market observers are keeping their expectations tempered going forward.

“Despite outlining a prudent standalone strategy for 2012, depressed volume and volatility in 1Q12-to-date weigh on forward estimates,” said Richard Repetto, analyst with investment bank Sandler O’Neill.

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