Although regulators on both sides of the Atlantic have shot down similar proposals in the recent past, experts who track these types of mergers say they do not expect regulatory problems with this deal because it does not raise anti-competitive concerns. The companies’ businesses do not overlap: The NYSE specializes in stock trading and ICE in futures trading.
Officials from ICE and NYSE Euronext, the parent company of the New York exchange, made their case to analysts in a call Thursday. Jeffrey Sprecher, chief executive of ICE, said that he had just returned from a “whirlwind tour” of meetings with global regulators, including five in Europe, and that the deal was well received.
“You can just see on its face that the businesses that we have are complementary to one another and not competitive with one another,” Sprecher said.
Stock exchanges have come under tremendous pressures to consolidate given the fierce competition in the cash equities market. About a dozen years ago, NYSE and Nasdaq were the dominant players. But regulations designed to gin up competition encouraged automated trading and allowed new trading venues to compete with legacy exchanges.
Now, 13 public exchanges and dozens of other private trading venues exist in a marketplace dominated by computer trading that takes place at blink-of-an-eye speeds. As of November, no single exchange had more than a 15.5 percent share of the market, with Nasdaq in the lead, according to Rosenblatt Securities.
“The regulations didn’t just create competition. They created hyper-competition,” said Thomas Caldwell, chairman of Caldwell Securities in Toronto and a shareholder in NYSE Euronext. “These competitors, some of which had lower costs and fewer [regulatory] requirements, have bled off tremdous amounts of volume from the main exchanges.”
Larry Harris, a finance professor at the University of Southern California’s Marshall School of Business, said computerized stock trading has made the exchanges more efficient, has shrunk employment and has wrung out cost.
“But it’s a declining industry,” said Harris, a former chief economist at the Securities and Exchange Commission. “It’s not because people don’t demand the services. It’s that the industry can provide the services so cheaply, they no longer make big profits.”
By contrast, the profit margins at futures exchanges like ICE have been higher than those of stock exchanges because there’s less competition because of different regulatory structures, said Justin Schack, managing director at Rosenblatt Securities.
For instance, if someone buys 100 shares of General Electric on the NYSE, he or she can sell them on Nasdaq. But the clearinghouses that settle the trades for futures exchanges are not required to accept trades in the same product from competing exchanges. “It’s easier to defend your turf in the futures market,” Schack said.
Against that backdrop, ICE has done nicely for itself since its creation in 2000. Its open contracts — commitments by traders to deliver commodities by certain dates — are up 60 percent since December 2010, and 96 percent of those contracts are energy commodities.
Futures exchanges are used not only by people speculating on the direction of commodities prices but also by businesses seeking to hedge and minimize the risk of losing money because of volatile commodities.
By merging, ICE and NYSE should achieve $450 million in cost savings by the second year, according to the companies. NYSE stock closed at $32.25 per share, up $8.20, or 34 percent. Shares of ICE climbed 1.4 percent, closing at $130.10 per share, up $1.79.
The Justice Department declined to comment about the merger. The Securities and Exchange Commission, which polices the market, said in a statement that its reviews of exchange mergers have traditionally focused on “whether the combined entity’s rules and governance structure promote regulatory compliance.”
Last year, the Justice Department blocked a hostile takeover of NYSE Euronext by ICE and Nasdaq OMX, citing antitrust issues. That deal emerged in reaction to a 2010 plan that would have combined NYSE Euronext and the German exchange Deutsche Boerse. European regulators nixed that deal.
Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said the Nasdaq bid did not pass regulatory muster because Nasdaq is a NYSE rival, thereby raising competitive concerns, and the Deutsche Boerse deal faced nationalistic objections about a German firm taking over a U.S. institution. But he said “the odds favor regulatory clearance” of Thursday’s deal.
Staff writer Steven Mufson contributed to this report.