Thursday, February 17, 2011

On The NYSE-Deutsche Borse Merger

I saw an interesting take on the NYSE-Deutsche Borse merger from a floor broker the other day on CNBC.

A periodic guest/contributor named, I think, Peter Costas, he was livid about the merger. It shows you how far the NYSE has come from its once-cozy specialists world. The world of legal front-running, inefficient personal involvement in trades, and an avoidance of acknowledging the reality and capabilities of modern technology. For all his faults taking the Merrill Lynch CEO job and botching it, NYSE ex-CEO John Thain probably saved the place.

Yet, Costas mentioned some risks on which the Germans and current NYSE CEO Ducan Niederauer are silent. Think of it as a rerun of the Daimler-Chrysler merger.

Costas wondered aloud what would happen to the New York trading floor, should profits drop or costs rise? How committed would the merged, Germany-headquartered company really be to maintaining the current physical presences in the US?

Since so many pundits characterize the deal as really all about derivatives and other non-equity products, I suspect Costas' fears are not trivial. Nor totally misplaced.

On the other hand, also on CNBC earlier this week, Jim Chanos expressed no interest nor concern about the NYSE-Deutsche merger. But Chanos doesn't really seem all that emotional about that sort of issue to begin with. He didn't say he thought the concerns people had about the NYSE being controlled by overseas management/ownership was misplaced. He simply said he didn't really care.

Niederaur is taking pains to stress how current ownership of the NYSE and Deutsche Borse is predominantly American, by shareholders. A situation which is both fluid and uncontrollable. But his temper came out when CNBC co-anchor Mark Haines accused him of selling out Americans and repeatedly invoked the "buttonwood tree." In retaliation, Niederauer said, in a close paraphrase, while punching Haines on the arm,

'That's what I get for giving CNBC the first interview about this deal.'

Niederauer looked like he feels he needs to do all he can to convince investors, regulators and politicians to allow this merger.

Perhaps the real issues here aren't even being spotted yet. For example, listing standards. If the NYSE becomes controlled by European owners, who is to say that listing standards for what was America's largest equity market won't be controlled by Europeans?

That would indicate, however, truly global equity markets.

One thing that does make sense to me, however, is the comments of pundits regarding derivatives. Exchanges tell customers that they provide efficiency and best execution. But the truth is, profits for these entities come primarily, in a margin sense, from newer, less-well-understood, complex instruments. Like, well, derivatives.

That's why, over time, human floor specialists have declined in value. The instruments of which they allegedly facilitate the buying and selling have simply grown less profitable to intermediate.

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