Unprecedented Change For Stock Exchanges

The New York Stock Exchange, the iconic symbol of American capitalism, hadn't changed much in some 200 years of buying and selling stocks. Then John Thain took the corner office.

When the former Wall Street banker took over as chief executive in late 2003, he immediately began working on a global strategy. In 2006, he deployed it — bringing NYSE Group Inc. public in March, announcing its plans to acquire Paris-based Euronext in June and introducing electronic trading in October.

The NYSE serves as just one example in a year of unprecedented change for stock exchanges. And, the expected creation of NYSE Euronext, the world's first trans-Atlantic stock market, will usher in an even more high stakes landscape in 2007.

"Mr. Thain has done more in a year to advance the NYSE than perhaps in its whole history," said Bill Cline, managing director of global capital markets for consulting firm Accenture. "But, its not clear sailing for the exchanges. They have a lot of opportunities, but there's a lot of change to the competitive landscape as well."

They head into the new year with a fair amount of uncertainty, in particular, about who will end up owning the highly coveted London Stock Exchange. NYSE rival Nasdaq Stock Market Inc. has launched a $5.3 billion hostile takeover bid for the LSE, whose stockholders will have until Jan. 11 to tender their shares to the Nasdaq. The U.S.-based company already owns 27.75 percent of the London exchange.

Moreover, any marriage of a U.S. exchange with one of the European exchanges will be a complex process, requiring the integration not only of trading systems, but also reconciling different cultures and styles. And if Nasdaq should win the LSE, it will be saddled with billions of dollars in debt.

Nasdaq Chief Executive Bob Greifeld has in the past said the stock exchange's steadily growing profits will help pay down the borrowings, which can also be restructured into long-term debt or other loans. He also pledges that the combination will result in synergies that some believe could save about $100 million a year.

Charles Jones, a finance professor at Colombia Business School, noted the hard work still ahead for NYSE and Nasdaq officials. "What this year did was set us up for further consolidation, further automation, and further tumult," he said.

Both Thain and Greifeld — who have also have expressed interest in expanding into Asia and India — continue to slug it out domestically. Both are in a fierce battle not just to lure more initial public offerings, but to also steal listings from each other.


Take E-Trade Financial Corp. as an example. The online brokerage went public on the Nasdaq in 1996, then was lured away by the NYSE in 2001. Earlier this month, E-Trade announce it flip-flopped — it will list on the Nasdaq again in January.

Also this month, software company Red Hat Inc. left the technology-laden Nasdaq behind, and joined up with the NYSE. It marked the 12th company to transfer to the NYSE from the Nasdaq in 2006, while four companies went the other way.

"All is fair in love and war — the competitiveness between the NYSE and the Nasdaq is about as long running as any two companies in America," said Ed Ditmire, an analyst with Fox-Pitt Kelton.

"A lot of the pressures have flowed from pricing cuts to the customer, rate reductions for the brokers, and the only thing left for them is to go at each other," he said. "With these two players controlling almost all the exchange trading in stocks, it very much is a zero sum game for them."

He points out that while the Nasdaq and NYSE continue to focus on each other, other competitors are beginning to grow stronger.

The New York Mercantile Exchange went public this year in one of the biggest IPOs since 2000, raising capital for a potential acquisition. The Chicago Mercantile Exchange and Chicago Board of Trade will combine to form one futures exchange next year. And, IntercontinentalExchange Inc. picks up agricultural commodities via its acquisition of the New York Board of Trade.

Meanwhile, this year seven major investment banks — including Goldman Sachs Group Inc. and Citigroup Inc. — said they will develop its plans to form a rival European exchange. Analysts say the move is more about making sure the two big exchanges don't consolidate too much power, and begin raising prices or listing fees.

One thing all the stock exchanges might agree on — rolling back tough regulatory guidelines that make it more expensive for companies to do business in the United States. Repealing parts of Sarbanes-Oxley, which has prevented many foreign companies from listing in the U.S., will be about the only thing bringing rival exchanges together this year.

"How regulators weigh in will probably set the stage, positive or negative, for future transactions that span national boundaries," said Accenture's Cline.

By Joe Bel Bruno