James Rundle: Hail to the King

While most of the Western world was beginning to wind down for the holidays, waking up with a sore head after various office parties, two boardrooms in Atlanta and New York were preparing to release one of the biggest news stories of 2012. The IntercontinentalExchange (ICE) announced, in a remarkably restrained manner, that it would be acquiring NYSE Euronext. It came out of left field, but ICE, known for its commodities business in a field generally dominated by Chicago, has been an activist upstart for quite some time.

The effect that the combination of NYSE Euronext and ICE will have can’t be understated. The consolidated group will have a market capitalization of around $15 billion and will spread across commodities derivatives, credit derivatives, equities and interest-rate derivatives. ICE plans to operate dual headquarters for the company—one in Atlanta, the other in the iconic Wall Street NYSE building, while also opening a Midtown office.

Not all are enthused, naturally, with a recent editorial in The New York Times positing that groups this size are simply too big to be regulated, and could present a systemic risk of contagion in the event of failure.

No-Frills
Acquisitions this size are unprecedented and therefore typically surprise the market, even though ICE has been circling NYSE, particularly its futures business in the form of NYSE Liffe, for quite some time. Under the terms of the deal, ICE founder, chairman and CEO Jeffrey Sprecher will become CEO, while current NYSE CEO Duncan Niederauer will head up the NYSE portion of the business and will become overall president.

The expansion into Europe could prove to be a thorny problem, though. European regulators, which have been fastidiously picky regarding antitrust measures, could make life difficult for further operations. ICE’s and NYSE’s suggested plans to spin off the European equities, options, and indices businesses could also run into problems depending on the potential suitor. Deutsche Börse is in by far the best position to acquire these, but monopoly concerns could hinder such a move. Other potential bidders include the London Stock Exchange (LSE) and Spain’s Bolsa y Mercados Españoles (BME).

The effect that the combination of NYSE Euronext and ICE will have can’t be understated.

For such a finance-focused acquisition, there’s been little mention of NYSE Technologies, the exchange operator’s systems and networking arm. There have been large-scale investments in datacenters in London, and in Mahwah, NJ. The Capital Markets Community Platform continues to operate, as does NYSE’s other technology-related endeavors, such as the Secure Financial Transaction Infrastructure (SFTI).

To what extent NYSE Technologies grows will depend on profitability, but an exchange without a technology arm these days is like a bicycle without gears. The data business remains lucrative, but a NYSE–ICE investor presentation said that any initial public offering (IPO) of Euronext would have the “potential inclusion of the NYSE Euronext technology businesses supporting the Continental European markets.”

The Big Board(s)
The derivatives piece is the key. With regulatory mandates pushing derivatives trading onto centralized platforms with formalized clearing requirements through central counterparties, exchanges are seeing an opportunity to recoup lost volumes and money through offering similar products on-exchange. This ICE–NYSE combination will create the third-largest derivatives market operator in Europe, behind Deutsche Börse and the Chicago Mercantile Exchange. It will give ICE clients the chance to trade outside of US hours, while retaining a clearing component, illustrated by the recent agreement for NYSE Liffe to clear through ICE Clear Europe.

Far from this capital markets business, maybe it’s time we all became logo developers and merchandise producers—they’re having a cracking time at the moment.