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ICE-NYSE Deal Signals Major Change in Future of Trading

By , Money Morning •

Intercontinental Exchange (NYSE: ICE) and NYSE Euronext (NYSE: NYX) announced a deal before market open today (Thursday) by which ICE will acquire NYSE Euronext for $8.2 billion in cash and shares.

News of an ICE-NYSE deal pushed NYX shares up 33% by afternoon trading, near the $33.12 bid price. The acquisition is subject to approval by regulators in the United States and Europe.

This is ICE's second bite at the apple. A deal in which ICE and NASDAQ planned to take over NYX was scuttled last year by U.S. regulators who said that a combination between NYSE and NASDAQ OMX Group (NASDAQ: NDAQ) would create an equity trading monopoly in the United States.

Most analysts agree that the major rationale behind ICE's interest in NYSE Euronext is the latter's ownership of LIFFE, the leading European derivatives exchange. European regulators would have to approve the acquisition of LIFFE by ICE, which is a major electronic commodities and derivatives exchange in the U.S.

"ICE is after Liffe, that is the crown jewel of NYSE Euronext," said Peter Lenardos, analyst at RBC Capital Markets in an interview with Reuters. "Strategically it makes sense for ICE to enter the European derivatives space in a meaningful way."

Lenardos said that a combined entirety would be able to compete more effectively with the CME Group in both trading and clearing of OTC products.

NYSE Deal: Stocks Are Not the Future

The deal shows how equity trading has changed over the last decade.

"The New York Stock Exchange has effectively become a wasting asset," former U.S. Securities and Exchange Commission Chairman Harvey Pitt told CNBC. "It's kind of sad to see what was once the premier exchange in the world now selling for what is a relatively low price compared to its historic value."

Pitt said it shows that derivatives and futures, not equity trading, are the "wave of the profitable future."

"Technology has changed the landscape," said Pitt.

Despite the deal's focus on derivatives, ICE said it was committed to preserving the NYSE Euronext brand, but Europe is a different story.

"We believe that ICE will have little use for NYSE Euronext's equities business," which includes stock exchanges in Paris, Amsterdam, London and Brussels, Lenardos wrote in a research note cited by USA Today.

Lenardos and other analysts have speculated that ICE might spin off NYSE Euronext's European stock exchanges if it can get regulatory approval to do so.

While ICE is expected to keep the NYSE, CNBC's "On-Air Stocks Editor" Bob Pisani said it's still possible the iconic NYSE trading floor could be spun off, too.

The ICE acquisition of NYSE Euronext is not expected to run into any anti-monopoly issues in the United States since ICE does not have an equity exchange business. Europe is another matter.

NYSE Deal: What About Investors?

NYSE Euronext may have had little choice but to sell itself off to an "upstart" derivatives exchange because of depressed volumes and competition from other marketplaces and dark pools.

"The NYSE needed to do a deal," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Volumes were dropping every year, profitability for the market makers was dropping, and other exchanges were taking up the slack."

Equity volumes have dried up since the financial crisis of 2008, particularly volumes traded on the floor of the New York Stock Exchange as opposed to high-frequency trading, which makes up the vast bulk of equity volume today.

It's too early to tell though if the NYSE deal is a better one for investors, said Fitz-Gerald.

"The theory is that more competition is good but the trend in big banking, big companies and big markets over the past decade has proven that too big to fail doesn't always work out that way," said Fitz-Gerald. "Another way to look at deals like this, for example, is that trading activity is going to be more concentrated and if the big boys want to use that to their advantage they will. Bigger traders may be able to fight back but the avenues to do so for individual investors will probably be very limited if push comes to shove."

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