NYSE: Ring That (Merger) Bell

[don]

By MICHAEL J. DE LA MERCED

An $8 billion exchange merger is in the works that underscores how the global market for derivatives has eclipsed that for stocks.

The owner of the venerable New York Stock Exchange is in talks to be acquired by an upstart commodities and derivatives trading platform, according to people briefed on the matter. The IntercontinentalExchange is expected to offer about $33 a share, with two-thirds of that in stock, one of these people said. That represents a premium of 37 percent to NYSE Euronext's closing stock price on Wednesday.

A deal could be announced as soon as Thursday morning, though these people cautioned that talks may still break down.

While the New York Stock Exchange, with its opening bell and floor traders, has been the public image of a stock market for two centuries, it is NYSE Euronext's businesses in the over-the-counter trading of derivatives - including the Liffe market in London - that appear to be the main attraction in the merger talks.

IntercontinentalExchange, or ICE, was founded in 2000 and is based in Atlanta. It competes fiercely with the CME Group, a derivatives trading powerhouse that owns the Chicago Mercantile Exchange and the Chicago Board of Trade.

More than a year ago, ICE teamed up with the New York exchange's chief rival, the Nasdaq OMX Group, to make a hostile bid for NYSE Euronext. The two had sought to break up their older competitor's plan to merge with Deutsche Börse of Europe, which would have created a powerful trans-Atlantic company with a big market share in the trading of stocks and derivatives.

Under the terms of that deal, valued at about $11 billion, Nasdaq would have taken NYSE Euronext's equities business, while ICE would have assumed the derivatives operations.

But the Justice Department threatened to block that joint offer, on the ground that combining NYSE Euronext and Nasdaq would create an overwhelming monopoly in the world of stock trading.

The planned merger of NYSE Euronext and Deutsche Börse itself fell apart early this year after European antitrust regulators opposed the combination, on the ground that it would corner too much of the market in exchange-traded derivatives.

But the newest merger might pose fewer problems because ICE focuses on commodities like oil, natural gas and cotton, while NYSE Euronext plies mainly in stock and stock options and derivatives.

And unlike several proposed mergers, like that of the Singaporean and Australian stock exchanges, which fell apart last year on nationalist concerns, this potential deal would take place between two companies from the same country.

After its deal with Deutsche Börse collapsed, NYSE Euronext was left to conduct some soul-searching. At the time, the company said that it would most likely look to smaller acquisitions and cost-cutting.

The trading of stocks has become a less attractive business. The New York Stock Exchange is now responsible for only about 11 percent of all stock trading, while NYSE Euronext's electronic Arca platform accounts for another 12 percent, according to industry data.

The average number of American stocks traded each day has fallen every year since 2009, and has continued to decline over the course of 2012, according to statistics from Credit Suisse. The volume of trading in futures and options, where ICE is focused, has also fallen since last year, but less than in stocks.

A tie-up with ICE, however, would link NYSE Euronext to one of the industry's fastest-growing exchanges. ICE has some of the highest profit margins in the business.

It might also reap some of the benefits that have driven a decade-long spree of consolidation among exchanges. Such companies have long sought to gain the greater scale and cost savings that come from combining back-end operations and staff cuts.

Still, the potential merger would sharply expand ICE, which despite its bigger market value is a smaller company. It has a little more than 1,000 employees, while NYSE Euronext has 3,077.

It isn't clear whether other exchanges would seek to break up the proposed transaction. The CME Group is a candidate to express opposition. But the firm appeared to have little appetite in bidding for NYSE Euronext last year, and it may run into antitrust concerns.

Other potential spoilers, including the Hong Kong and Singaporean exchanges, could run into nationalist concerns.

Shares of NYSE Euronext rose more than 21 percent in after-hours trading, to $29.20, after The Wall Street Journal reported news of the talks.

Nathaniel Popper contributed reporting.

http://dealbook.nytimes.com/2012/12/.../?ref=business


in related newz . . .


Knight Capital and Getco to Merge

By DEALBOOK

Knight Capital, the stock market-making firm that nearly collapsed last summer after a $440 million trading glitch, has reached an agreement to merge with Getco, the Chicago-based high-speed trading firm.

The $1.4 billion deal, which was announced on Wednesday, will give privately held Getco a public listing in a new holding company.

"The combination of Knight and Getco will create a powerful, dynamic firm with an unmatched ability to deliver results for clients,"

Daniel Coleman, Getco's chief executive, said in a statement. "Market participants will benefit from industry-leading services, and our larger capital base will provide strong support for existing operations, as well as an attractive currency for growth."

Under the terms of the deal, shareholders of Knight other than Getco can receive $3.75 for every share or one share in the new holding company. Getco will get 233 million shares in the new company, and its 57 million shares of Knight will be retired.

Getco, a big Knight shareholder, was among the financial firms that swooped in with a $400 million rescue package for the firm, based Jersey City, in August, days after its trading loss.

The firm that led and assembled the lifeline, Jefferies Group, is heading up the financing for the merger, including refinancing all existing Knight and Getco debt. The private equity firm General Atlantic is making an additional $55 million equity investment.

Sandler O'Neill & Partners and the law firm Wachtell, Lipton, Rosen & Katz advised Knight. Jefferies and the law firm Sullivan & Cromwell advised Getco. Bank of America Merrill Lynch provided a fairness opinion to the board of Getco.

http://dealbook.nytimes.com/2012/12/.../?ref=business

as derivatives move to the forefront and high speed trading consolidates, it appears the stage is being set for social security's 401k magic trick . . .

we will know when social security is in trouble when Wall Street is no longer interested in 'managing' it

[don]

A Done Deal

The New York Stock Exchange called time on two centuries of independence on Thursday, agreeing to an $8.2bn takeover that will hand control of the icon of American capitalism to an Atlanta-based energy trader.


The stock exchange's holding company, NYSE Euronext, has agreed to an offer of $33.12 a share in cash and stock from IntercontinentalExchange (ICE). ICE was founded in 2000, NYSE in 1817. The combined company would have headquarters in both ICE's home of Atlanta and in New York.


The takeover comes amid a historic shift for Wall Street and stock exchanges around the world. The move to electronic trading, fierce competition between exchanges and the sharp decline in trading commissions has led to a wave of mergers and takeover offers that have failed amid regulatory concerns.


The exchange, also called the Big Board, has moved to embrace technology in recent years but still also uses the "open outcry" system with traders in bright-coloured jackets shouting and waving their hands to make orders.


Charles Geisst, author of Wall Street: A History and a finance professor at Manhattan College, said: "The NYSE has faded in the past few years, for most professionals this is a sign of the times. Trading could take place on the moon right now as long as you have the right communications."


Jack Ablin, chief investment officer at BMO Private Bank, said: "The NYSE is an icon but it runs the risk of becoming irrelevant, it's just being outplayed by its more technologically savvy competitors."


"When I started out NYSE was the stock market," said Ablin. "But things are changing at an exponential speed. It's become less and less relevant with every passing year."


Last year ICE teamed up to make a bid for NYSE with Nasdaq, the New York-based exchange that is home to tech giants including Apple and Facebook. That deal fell apart amid regulatory concerns. The US bid followed an attempt to merge with Germany's Deutsche Borse, which triggered concern with European regulators and a protectionist backlash in Washington. NYSE Euronext's shares have fallen over 30% since the ICE and Nasdaq bid failed and ICE's latest offer is $3bn less than the previous one.


"The Board of NYSE Euronext carefully considered a range of strategic alternatives and concluded that ICE is the ideal partner for NYSE Euronext in an evolving market landscape," said Jan-Michiel Hessels, the chairman of NYSE Euronext's board.


The NYSE once dominated stock trading in the US but has been losing market share since the 1990s when the all-electronic Nasdaq opened for business and new rules allowed shares to be traded more freely across multiple venues. Today Chicago's CME is the predominant exchange in the US, valued at $17.5bn, $10bn more than NYSE Euronext.


"There was a time when NYSE was 60-70% of the equities traded in the states. Now on a good day it's about 20%," said Geisst.
The exchange moved to embrace the change in 2005 by buying electronic-trading company Archipelago and becoming a public company. In 2006 it merged with Euronext, which operates stock-exchange businesses in France, the Netherlands, Belgium and Portugal.


ICE was founded in 2000 by chairman and chief executive officer Jeffrey Sprecher as an electronic commodity trading exchange. Sprecher has grown the business through a series of big deals. ICE now runs the world's biggest energy futures market and commodity markets in the US and Canada. The deal will add NYSE Liffe, the European derivatives exchange to ICE's portfolio, a business Sprecher has long coveted.


"Our transaction is responsive to the evolution of market infrastructure today and offers a range of growth opportunities, while enhancing competition in US and European markets and broadening our ability to address new markets and offer innovative products and services on a global platform," said Sprecher.

[lektrode]

Re: A Done Deal

guess the only question now - assuming this one completes - is:

will this be another Enron

The New York Stock Exchange called time on two centuries of independence on Thursday, agreeing to an $8.2bn takeover that will hand control of the icon of American capitalism to an Atlanta-based energy trader.


The stock exchange's holding company, NYSE Euronext, has agreed to an offer of $33.12 a share in cash and stock from IntercontinentalExchange (ICE). ICE was founded in 2000, NYSE in 1817. The combined company would have headquarters in both ICE's home of Atlanta and in New York.
"Our transaction is responsive to the evolution of market infrastructure today and offers a range of growth opportunities, while enhancing competition in US and European markets and broadening our ability to address new markets and offer innovative products and services on a global platform," said Sprecher.

or,
another AOL/TW

Time Warner announced that AOL would buy Time Warner for more than $160 billion in the largest merger in corporate history.

The New York Times called the deal “the best evidence yet that old and new media are converging” and speculated that “it could be the Internet companies that do the buying and the old media that sell out.”
The merger gave Time Warner new platforms for its media properties like Time, People, Fortune, Warner Entertainment, HBO and CNN. In turn, Time Warner gave AOL access to its cable systems, which allowed for “much speedier Internet and interactive television services.”

[don]

Tradings New Reality

By BEN PROTESS and NATHANIEL POPPER

On a warm day in Boca Raton, Fla., the host of a reception for an annual financial conference was not a big bank or a powerful exchange as in years past, but a young firm based in Atlanta.

Guests who gathered at the oceanfront resort were surprised. They were greeted with bottled ice water that carried the company's logo, and as they left, were invited to grab iPod Shuffles.

That event, some four years ago, was the Wall Street equivalent of a coming-out party for the firm, IntercontinentalExchange, or ICE, an electronic operator of markets for derivatives and commodities. Now, the markets upstart is announcing itself to a much larger world with an $8.2 billion deal to buy the symbolic cradle of American capitalism, the New York Stock Exchange.

The takeover illustrates starkly how trading in commodities and derivatives has become much more lucrative than trading in the shares of companies. Warren E. Buffett warned in 2003 that the "derivatives genie is now well out of the bottle," and that the genie, even after a global financial crisis, was not going back. Currently, derivatives - financial bets tied to underlying assets like oil prices or interest rates, among other things - are a $600 trillion market. Even the parent of the N.Y.S.E. attracted its suitor largely because of its ownership of Liffe, a major derivatives exchange in London.

For many, the Beaux-Arts New York Stock Exchange, and images of traders looking despondent or exuberant on its floor, represent what making money is all about. Yet Wall Street itself has found it more profitable to bet on fluctuations in natural gas or corn or on interest rates. The financial industry often does so electronically and through platforms in cities as scattered as London, Chicago and Atlanta. The biggest bonuses each year are typically for traders who reaped rich gains on these often complex financial products.

That change, decades in the making, has left the New York exchange, with roots going back 220 years, in an increasing difficult position as trading volumes slump and profit margins stay razor thin. While its acquirer has pledged to keep a dual headquarters in the exchange building in Lower Manhattan, as well as in Atlanta, the center of power in finance long ago migrated elsewhere.

The success of the newly combined companies hinges on the derivatives business. ICE is hoping that a greater share of derivatives trading will go through its clearinghouse operations, which act as backstops in case one party defaults. It is being aided by the Dodd-Frank financial regulatory overhaul, which is forcing Wall Street banks to push their derivatives trades into clearinghouses and regulated exchanges.

"For the past decade, our solutions made our markets increasingly electronic and increasingly clear," Jeffrey C. Sprecher, chief executive of ICE, said this month. "Today, financial reform is imposing that vision on many markets through a rule-making process."

While Dodd-Frank compliance is still in its early days, and the volume of derivatives trading remains depressed amid broader economic uncertainty, the law is ultimately expected to cement ICE's business model into the regulatory code.

"Despite the complaints, there's no question that at the end of the day, Dodd-Frank will be a financial boon to exchanges," said Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, which regulates derivatives.

Still, such a development will not do much for the traditional business of the New York Stock Exchange. Mr. Sprecher said on Thursday that he was committed to keeping the floor of the exchange open. But according to people briefed on his plans, he intends to use the stock trading operation and its steady cash-generating abilities to finance future deals and expansion efforts.

Nowhere have the changing fortunes of ICE and the parent of the New York exchange, NYSE Euronext, been more apparent than in their value on the stock market. In April 2011, when ICE first tried to acquire NYSE Euronext in league with Nasdaq OMX, it was worth about $1.5 billion less than the New York company. Just over a year later, ICE was worth nearly $4 billion more than NYSE Euronext, even with less than a third of its revenue.

ICE was founded in 2000 by Mr. Sprecher, who began his career developing power plants. In the 1990s, he saw that many power companies and financial firms wanted to hedge their investments in energy with financial contracts, but the market for these contracts was disorganized and opaque.

Mr. Sprecher bought an obscure exchange for buying and selling electricity in Atlanta and turned it into ICE with financing from BP and Wall Street firms, including Goldman Sachs and Morgan Stanley.

Banks were drawn to the idea of a standardized place to buy and sell derivatives tied to the value of oil and other commodities. But they also hoped to create a competitor to the virtual monopoly position being built up by the Chicago Mercantile Exchange in futures trading.

"You talk to people in Chicago, they basically think that ICE is just a front for the banks," said Craig Pirrong, an expert in futures trading and director of the Global Energy Management Institute at the University of Houston.

As the company grew through a quick series of acquisitions, Mr. Sprecher won a reputation for being the "enfant terrible" of the energy industry, with a "sharp eye for identifying opportunities and seizing on them in a very aggressive way," Dr. Pirrong said.

Early on, ICE sought to move all trading onto computers, allowing firms to buy and sell contracts 24 hours a day. Soon after buying the International Petroleum Exchange in London, ICE shut down its trading floor.

"They were a technology company from Day 1," said Brad Hintz, an analyst with Sanford C. Bernstein.

ICE also decided to fashion its own clearinghouse, rather than tap an outsize firm. It expanded through acquisitions, planting the seeds for growth in 2008, when it took over the Clearing Corporation, home to a popular derivative known as a credit-default swap.

The Dodd-Frank overhaul may provide additional benefits for ICE. Under the law, exchanges must turn over public and private information to outside data warehouses, which will, in turn, share the information with regulators. Sensing an opportunity, ICE created its own warehouse, named ICE Trade Vault.

ICE and its Chicago rival, CME Group, have also moved in recent months to convert swaps trades, which are facing more scrutiny under Dodd-Frank, into old-fashioned futures contracts. Futures trading is lucrative territory for the exchanges in part because they can shut out competitors.

"The reality is that there are incentives to convert swaps into futures, where there's less competition," said Richard M. McVey, chief executive of MarketAxess, an independent trading platform that is expanding into the swaps business. "There's no requirement for CME and ICE to open their futures clearinghouses to other exchanges."

Despite its growing prominence, ICE has a small footprint in Washington. With only two full-time lobbyists, the company relies on Mr. Sprecher to communicate with regulators.

"Jeff is the company," one official said, though others said he had loosened his grip over the last year or so.

He is well received, officials say, in part because he has embraced some reforms. Unlike executives of other exchanges and financial firms, Mr. Sprecher did not resist an effort in 2009 by the Commodity Futures Trading Commission to close certain loopholes.

Officials recall him saying, "Tell me what the rules are, and I'll make money with them."

Michael J. de la Merced contributed reporting.

[don]

Re: Tradings New Reality

Or as they say, Rejuvenation through Consolidation . . .