essays pieces of the puzzle
Thursday, December 27th, 2012
a new day

12 1227 zICE zNYX

On Thursday, while I was out shopping, IntercontinentalExchange (ICE) agreed to buy NYSE Euronext (NYX).  According to Bloomberg, given that NYX owns the biggest exchanges in the United States, France, and the Netherlands and ICE is the second-largest futures market, the transaction “underscores both the growing importance of derivatives and the diminishing influence of the 220-year-old NYSE.”

The performance of the two stocks is shown in the top panel, starting when the NYSE began trading under its own name.  Therefore, monstrous early runs in ICE and NYSE when it was a part of Archipelago aren’t reflected here.  That was during a time when all exchanges everywhere seemed to be going up every day.  The period shown here reflects the subsequent divergence in fortunes of the winners and the losers.

The lower panel illustrates the big difference in margins between the two firms.  (The Wall Street Journal said ICE’s operating margin was double that of NYX, but it’s really three times.  This is the trailing one-year margin, not quarter by quarter.)

Given that gap and NYX’s struggle to stay relevant, why do the deal?  TABB Forum offered a nice explanation of the rationale.  (The site requires free registration.)  The article calls the combined firm “ideally positioned.”  Referring to it as “Newco,” TABB says:

“Newco will be much better positioned than either firm alone to offer capital efficiencies for listed derivatives and cleared swaps.  This is a very big deal.  Newco can offer near-complete product and asset class coverage globally through its collection of exchanges and trading venues.  These will be supported by ICE’s regional and asset-class-aligned clearinghouses.  Newco can thus offer customers cross-product and cross-asset risk management and margining specifically aligned to maximize capital efficiency for products traded on the organization’s many venues.”

If the firms can jump all the regulatory hurdles, the deal should close in the second half of 2013.  (Chart:  Bloomberg terminal.)