If you can’t beat’em, join ‘em

A transformative deal for the New York Stock Exchange

If John Thain, the chief executive of the New York Stock Exchange (NYSE), learned anything in his many years at Goldman Sachs, it was: if in doubt, cut a deal. The one he unveiled on April 20^th – the purchase of the all-electronic Archipelago exchange – may transform his 212-year-old, floor-based, not-for-profit mutual company into the world’s most modern financial market.

The deal, which is subject to approval by shareholders and regulators, would give the NYSE’s 1,366 seat-holders (and owhers) 70% of the new company and $400m in cash. Archipelago shareholders will get the other 30%.

This continues the wave of consolidation that has seen the number of electronic exchanges dwindle from a dozen in the 1990s to about five. More matches may follow. NASDAQ and Internet are expected to announce their union. Because trades gravitate to the most active exchanges which offer the most liquidity, peripheral markets, notably regional exchanges, have withered away.

This changed a bit over the past decade as the NYSE began to lose some market share to new, faster, cheaper all-electronic rivals exemplified by Archipelago. Meanwhile, its reputation was tarnished by successful prosecutions of Big Board traders who put their own interests ahead of their customers’, and by weaknesses in its self-regulatory function. Seat prices slid – although they have risen strongly in recent weeks.

Now Mr.Thain has made strides on all fronts. The NYSE is to spin off its regulatory arm into a separate, not-for-profit entity, removing potential conflicts of interest. And it will become a listed, for-profit company without following the lengthy route, via de-mutualisation and a public offering, that has taken other exchanges years. The merger also gives the exchange a way into NASDAQ-listed stocks, in which Archipelago has a 25% market share, and the growth business of derivatives trading.

Many hurdles still lie ahead. For now at least, the Archipelago merger only brings the two firms under the same roof; it does not knit them together. There are no plans yet to integrate the two exchanges’ technical platforms or businesses, calling into question the synergies behind the deal. So Archipelago and NYSE shareholders will continue to have competing interests. In particular, NYSE owners, many of whom are traders with an interest in the continued existence of the trading floor, are likely to resist moves towards an all-electronic format, and may even stymie the deal. “The merger won’t go down quietly,” says Benn Steil, a financial expert at the Council of Foreign Relations. In becoming a for-profit company, the NYSE also will have to manage a difficult change in its relationship with other Wall Street firms, which were part of the mutual structure but are now competitors as well as customers.

The ulitimate test of the merger’s success will be whether it lowers the cost of trading. Richard Grasso, Mr. Thein’s predecessor, who was booted out after a scandal over the size of his pay packet, did not manage this in his long tenure. If Mr. Thein can meld the two businesses and pull this off, the deal will be a brilliant coup. If he fails, the NYSE will continue to have a struggle on its hands.

The Economist

Notes

1. if you can’t beat’em, join’em – something you say when you decide to do something bad because other people are getting an advantage from doing it and you can’t stop them

2. not-for-profit (non-profit) company – некоммерческая компания

3. floor-based exchange – традиционная фондовая биржа с торговым залом в отличие от полностью компьютеризированной биржи (all-electronic exchange)

4. Big Board = NYSE

5. mutual company – взаимная компания, чья собственность и прибыль распределяются между ее акционерами в соответствии с объемом бизнеса, который последние дают данной компании; de-mutualisation – потеря взаимного статуса: изменение статуса компании со взаимного на акционерный

6. to make strides – многого добиться