The 'reverse merger' (announced late yesterday) of the New York Stock Exchange into Chicago-based electronic trading firm Archipelago, to form a public company called NYSE Group, Inc. (to be led by NYSE CEO John Thain), is being called 'historic' and 'tectonic' by the Wall Street Journal, (subscription required.) The Journal goes on to note that the deal will provide what customers have been begging for:
Investors want the faster, cheaper execution of their trades, and that has enabled electronic upstarts like Archipelago to quickly build formidable market positions. After years of trying to fend off the electronic competitors, the big markets have now decided that owning them makes more sense... The NYSE is hoping that hitching up with a more entrepreneurial company will help it mollify big investors such as Fidelity Investments, the mutual-fund giant, that have complained that the NYSE has worked too hard in recent years to defend its floor traders and not hard enough to make the floor friendlier to investors.
The New York Times, by contrast, implies that the move may have come just in time to save the NYSE from itself. I.e., a hyper-conservative culture, regulatory shifts that it has been unable to completely fend off with intense lobbying, multiple scandals (e.g., over former chairman Dick Grasso's pay) - all of which has tarnished the organization's hallowed 213-year-old brand, (for example, driving the price of a NYSE seat from a peak of $2.9 million in 1999 to a valuation of $1.76 million in yesterday's deal):
The merger is the most significant acknowledgement yet that the Big Board's traditional market, driven by human traders, may not be able to survive in an era increasingly dominated by instantaneous trades... critics say the [NYSE's floor trading] system is overrun with conflicts and rife with a history of misdeeds. After a three-year investigation, seven firms on the floor paid more than $240 million in fines for trading violations. Last week, 15 traders were indicted on related charges.
Both papers are correct: it's a deal that 'works' for both pro-active and defensive reasons.
The Washington Post notes that it will help to quell conflict-of-interest concerns in other ways: "the new company would spin off the NYSE's regulatory arm as a not-for-profit entity called NYSE Regulation, much as Nasdaq did with its self-regulatory body NASD, formerly known as the National Association of Securities Dealers."
In a piece snidely if colorfully headlined "Thain Pulls Rabbit From Hat", Bloomberg highlights the fact that one goal in the deal is to cut $200 million in operating expenses from the combined company by, (in the words of NASDAQ's former head of strategy) "eliminating [the NYSE's] massive infrastructure costs"
That veiled reference carries huge implications for NYSE's little-known technology and infrastructure operations subsidiary, SIAC (an entity in which the less powerful American Stock Exchange (AMEX) also holds some equity.) So too for SIAC's new (post-9-11) resilient industry data network, SFTI, the neutrality of which may be called into question under a for-profit umbrella. (SFTI, short for Secure Financial Transaction Infrastructure is also described here and here.) I find no press or blog coverage of SIAC's or SFTI's fate in this deal - yet. Watch this space for more.
The Bloomberg article goes on to chronicle past NYSE failings in some detail, including the fact that the NYSE trading day has been only 6.5 hours long, versus 16 hours at Archipelago. Another item of note in the deal is the Goldman Sachs juggernaut. Not only is Goldman subsidiary and floor specialist Spear, Leeds, Kellogg consistently one of the highest volume, most powerful trading firms on the NYSE, but Goldman brokered the deal with Archipelago while holding 15% of Archipelago stock. I don't know if that represents a conflict of interest as far as the lawyers are concerned, but on Main Street USA, it will sure smell like one. In the WSJ article, SEC Chairman William Donaldson indicated that he thinks the deal is a good idea (not that much of a surprise given his past ties and biases), but he's indicated he plans to review it nonetheless. (The deal is not likely to close until late this year.) It will be interesting to see if how Eliot Spitzer certain politicians gets involved.
In a massively hubristic quip reminiscent of a famously similar line from General Motors on the brink of its long decline and some cynical ploys, John Thain remarked that "This combination will be good for investors and for America." Pffft! [wipes coffee from monitor] Well, maybe. In light of competitive threats from overseas (e.g., China - a subject I wrote about last winter), Thain may be partly right. Saying so directly is still a bit of a reach.
Thain followed that up in the press conference with: "This is absolutely not the end of the floor" Cough, cough... unless it is. When the floor inevitably goes away (and it will), my heart goes out to the local delis, coffee shops and bars in Lower Manhattan. Anyone who hasn't spent time in those places immediately before the opening bell, after the closing bell, or during a frantic stolen lunch break has missed an amazing lesson in brusque New York efficiency.
In an admittedly strained tie-in to my favorite subject (prediction markets), I'll note the almost obvious: the habit of evaluating the sense of a deal by reference to stock price moves is deeply ingrained into how Wall Street thnks. More of that culture will need to seep out into the wider world before prediction markets for non-financial events take hold. Some of that is already happening (e.g., around the presidential or papal elections), but the sea change is still in its infancy.
Other coverage of note on the NYSE/Arca deal includes:
The FT of London: "Long-awaited NYSE move sets off new debate"
The New York Post: "Shock Exchange"
Chicago Tribune: "Big Board Strikes a Big Deal"
Bill Cara's blog: Capital Markets and Social Equity
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