When attempting to make sense of long-term movements in the economy and the financial markets, it is common to ascribe a visual metaphor, such as a shape, to the ocean of data that lies before us. Thus, people love to talk of “V” shaped recoveries (a sharp decline followed by a sharp recovery), the slower and more subtle “U” shaped recovery, the despair-inducing “L” shaped trip to oblivion, and the rocky, roller-coaster of the the “W” — the double-dip recession with recovery.
Looking at the recent history of the exchange-listed equity trading business — the bread and butter of the New York Stock Exchange — it is difficult not to think of the letter “I”. The loss of market share in the face of growing competition from alternative exchanges like BATS and Direct Edge, and broker-owned “dark pools” that engage in non-public transactions — has been more or less straight down.
There hasn’t been much in the way of cyclical recovery of any sort — just a steady erosion of market share. The NYSE recently captured 80 percent of trading in its listed shares. Now NYSE Euronext has 26.2 percent market share in its own listed companies. Deutsche Borse, which offered in January to buy NYSE Euronext has fared about the same. The story is similar at exchanges in London and other financial centers.
It isn’t surprising that Nasdaq OMX would consider disrupting Deutsche Borse’s plans with a rival bid for NYSE Euronext. The apparent rationale for that move is interesting, though. It might simply look at a deal was a way to consolidate operations and cut costs, and leave it at that.
But Nasdaq OMX CEO Robert Greifeld apparently expects more from a combined business.
The Wall Street Journal said Tuesday that a Nasdaq OMX bid for NYSE Euronext could be made within 48 hours. “People familiar with Nasdaq’s strategy say the exchange operator believes that stock trading, while not as profitable as futures trading, is a cyclical business that is currently near a low point and could become more attractive if NYSE and Nasdaq combined their stock-trading efforts,” the Journal said.
What would drive such a recovery? Are the alternative providers of liquidity going to suddenly go away? That is not going to happen.
But it’s possible that years of recurring problems in the capital markets — from the financial crisis to the technology and high-frequency trading driven “Flash Crash” of 2010 — will arouse demand for greater transparency in the financial markets, creating an opening for the more traditional exchanges.
“The public is turned off. I think the public wants to have transparency,” says Muriel Siebert, the veteran investment adviser who founded Siebert & Co. 40 years ago, and became the first woman to own a seat on the NYSE or to run one of its member firms.
The regulatory push toward greater transparency in trading — especially in derivatives — might in theory help exchanges re-establish some power in the market, too. “Well, I would like to see it happen that way. But so far, none of the regulations have been put in place,” Siebert says.
The Nasdaq-NYSE combination make sense, she argues, because it would be able to serve a broad range of small, medium and large enterprises. And the national network of brokers linked to such an exchange could help reestablish trust in communities across the U.S.
And she is certain that the country as a whole benefits from maintaining domestic ownership of its major exchanges, to ensure the availability of capital to startups and small technology companies. If capital is based overseas, the intellectual capital and companies that lead to job growth may follow. She says it’s critical that the relationship between the capital markets and the public be repaired, both for the good of the markets and the public itself. And domestic ownership of the NYSE makes that easier.
“I think the public has been turned off from the (capital markets) for some very legitimate reasons, and that a Nasdaq-NYSE deal could help bring the public back,” Siebert said.
If she is correct, the “I” shaped decline of the exchange business might look more like a “U”, or at the very least, a “b”.
