Changing Exchanges

Adapt or die.

That’s the lesson of the ICE/NYSE merger. The Intercontinetal Exchange—an internet-based operator of energy and commodity futures and over-the-counter contracts—has bid for the New York Stock Exchange. Unlike NASDAQ’s bid, which ran into regulatory antitrust issues, or the offer by Deutsche Bourse, which was blocked by the European Commission, the merger with ICE will likely go through.

In this merger of non-equals, a tech-savvy startup with sound growth prospects and abundant cash purchases a centuries-old iconic brand mired in the past. We’ve all seen the pictures of the trading floor at the corner of Wall and Broad, heard the bell ring on special days, and watched movies where frantic runners carry paper orders to anxious specialists staring at monitors. But those images are fiction.

Now trades are executed on electronic exchanges and the profits are measured not in pennies, or tenths of pennies, but in hundredths of pennies. Discount brokers started the trend in the ‘70s that has led to today’s world of dark pools and high-frequency trading. In this dog-eat-dog world, the NYSE’s arcane approach made it look like a golden retriever competing with a pit bull.

It wouldn’t be surprising if ICE spins off the equity business in a year or so. Equity trading is important, but the real growth is in swaps and derivatives—a business with a notional value four times that of the global economy, and growing. In that business, branding matters. Thanks to the merger, ICE is about to get a great one.

Douglas R. Tengdin, CFA
Chief Investment Officer
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