We’ll have to wait a while before seeing benefits from the planned merger between the New York Stock Exchange (NYSE) and Euronext, but a slew of long-planned upgrades to the Liffe.Connect trading platform promise to deliver tangible benefits later this year.
Both NYSE Chief Executive Officer John Thain and Euronext CEO Jean-Francois Theodore managed to tweak our collective curiosity when they unveiled the proposal to merge their two exchanges. “A new range of [derivatives] products will be delivered,” said Theodore, while Thain followed up with a reference to “transatlantic indices and corporate credit derivatives,” presumably built in cooperation with MTS, the European global bond trading platform jointly owned by Euronext and Borsa Italiana.
Thain made it clear that NYSE and Euronext would cross-market each other’s products, and added derivatives were a central motivation for doing the deal. “We really do not have a derivatives business,” he said. “The combination of the strengths of both of our cash businesses with [Euronext’s] derivatives is one source of strength [for the merger].”
But as talk of the unconsummated merger recedes into boardrooms and regulatory channels where such deals ultimately die or come into reality, futures traders are settling in for a long, and potentially disappointing, wait.
“I have been thinking about what new products they could have up their sleeve,” says Clem Chambers, CEO of investment Web site ADVFN. “I have to admit, I haven’t come up with anything that makes me say, ‘Oh, wow! They can do this now!’”
Meanwhile, the merger has spun off a slew of speculative discussions about the players beyond the two axes of NYSE-Euronext and Nasdaq-London Stock Exchange (LSE).
The Italian exchange is also in talks to join NYSE-Euronext, and the Spanish exchanges are floating later this year, launching speculation about their place in the new trading landscape. Further east, the Polish exchange has expressed an interest.
Deutsche Börse is clearly the tragic figure of the drama having been on the verge of buying the LSE last year at a value well below today’s prices. That deal went south when a group of hedge funds, anxious for a merger between Deutsche Börse and Euronext, took large enough stakes in the German exchange to not only kill the LSE deal, but to oust CEO Werner Siefert.
And what about the Chicago Mercantile Exchange (CME)? CEO Craig Donohue has repeatedly stated he sees no reason to buy a stock exchange, but the exchange is a behemoth with a few billion in the bank — money that can be used for buying or for building. And size does matter.
“In the short term, the efforts of NYSE and Euronext to merge is really a story about a deal that will benefit the two companies more than it will traders,” says Chambers. “It gives them a critical mass of capitalization and clout they can throw around.”
That doesn’t mean traders will be left in the same old boat. The Liffe.Connect trading platform is set to replace the NYSE’s relatively clunky Arca OX options platform, and the new derivatives platform is to be “outsourced” to Atos Euronext Market Solutions (AEMS), the 50/50 joint venture between Euronext and software giant Atos Origin.
And even if the merger fails to go through, users will benefit from this summer’s rollout of the new Linux-based Liffe.Connect platform on Euronext. The move includes new architecture in both the trade-matching engine and the distribution network and has earned a lot of buzz in Frankfurt’s trading community, especially among smaller prop shops.
“Basically, we will be able to handle 10 times the message traffic for 25% of the cost,” says AEMS CEO Jean-Marc Bouhelier.
What’s more, the cost of adding a new host drops from the million plus dollars for a Sun Solaris or Tandem host to between $20,000 and $40,000, he says. The system will be on the Chicago Board of Trade next year, and you can bet algorithmic traders are gearing up to hit it with all the messaging they can.
It will be difficult to compete with that and there’s little chance of direct competitors getting a chance to license Liffe.Connect for themselves, since AEMS is half-owned by Euronext, which controls two of the four seats on the steering committee that must authorize new deals.
So, yes, we have a huge new kid on the block. Let’s just hope he wants to play the same game as the rest of us.
