Blame it on technology. The news this week that Deutsche Börse is close to effectively buying the New York Stock Exchange, a centuries-old symbol of American capitalism, has caused consternation but highlights the IT-driven, global reality of international markets.
The bottom line, according to observers, is that exchanges are now essentially global technology companies, not only running on, but also selling information systems. At a conceptual level at least, the business model of the exchanges is similar to that of Google and other technology and online-based companies; they live and die by getting customers information faster than their competitors.
"The grandfather of this deal was the rise of electronic exchanges, and the direct parent was use of electronic information systems, which are relatively uniform and ease mergers," according to Eric Gebaide, managing director at Innovation Advisors, an investment banking advisory services company whose clients include trading systems companies.
The rise of the early ECNs (electronic communications networks) such as Instinet, which lowered trading costs outside of traditional stock exchanges, along with moves by regulators to make brokerages more transparent, has lowered the costs of trading and increased competition. This has forced exchanges of all sorts to merge, diversify financial and trading services, and move into technology-platform sales.
After several prior attempts at a merger, the NYSE Euronext, the parent of the New York Stock Exchange, and the Deutsche Börse acknowledged Wednesday that they were in advanced talks to close a deal in which the German company, which operates the Frankfurt Stock Exchange, would end up owning about 60 percent of the U.S.-based trading institution.
"This transaction creates a group that is both a world leader in derivatives and risk management and the premier global venue for capital raising," according to theNYSE statement. "As a true pacesetter across the spectrum of capital markets services, the combined group will offer clients global scale, product innovation, operational and capital efficiencies, and an enhanced range of technology and market information solutions."
The combined group would be the world's largest exchange operator by revenue and profit, and would have dual headquarters in New York and Frankfurt, according to the statement.
The New York Stock Exchange was formed in 1792 under a sycamore tree on Wall Street and became a bastion of American capitalism by creating a stronghold for stock listings and trading. Under increasing competitive pressure, the NYSE got to its current bulk after it incorporated, among other companies, Archipelago, an electronic trading platform, the American Stock Exchange, and Euronext, branching out geographically into Europe and financially into options and derivatives along the way.
The stark reality that it now faces a merger in which a European company will become majority owner has stirred up some anxiety.
"Achtung! Germans taking over NYSE," read one headline in the New York Post, which led its story with the line, 'Your 401(k) may soon read "Made in Germany.' "
But New York Mayor Michael Bloomberg, himself a billionaire businessman, apparently approves. "I think it's very good for New York," Bloomberg said at a press conference. "You'll have the two strongest stock exchanges together, and it's going to give us access to Europe and them access to the United States in a way that some of our other competitors, like London, will not have. The stronger the New York Stock Exchange is in our global world, the better off we are."
Part of the rationale for the merger is cost savings. The companies said they will save €300 million (US$409 million) in costs, principally from economies of scale in information technology, and operational savings.
But more importantly, as the NYSE said in its statement, the merged company would "expect to generate substantial incremental revenues from clearing services, product innovation and cross-selling opportunities between the global cash and derivatives businesses."
Technology goes hand in hand with globalization as the fuel for mergers of this type and IT systems are sure to become part of the new entity's attempts at innovation.
The NYSE itself uses 100-gigabit optical network connections and is on the cutting edge of 100-Gigabit Ethernet deployment, all in the service of real-time information services used to compete against other exchanges.
But the NYSE also sells technology, and gains from information systems sales makes up a big chunk of NYSE cash flow. The NYSE Wednesday reported that revenue for the fourth quarter was $613 million, down from $640 million a year earlier. But Information Services and Technology Solutions revenue was $114 million in the fourth quarter, an increase of $11 million year-over-year.
The same forces that are bringing NYSE and Deutsche Börse together are also fueling other mega-mergers.
Hours before the NYSE and Deutsche Börse confirmed their talks Wednesday, the London Stock Exchange's agreement to purchase the Canadian stock market operator TMX became official. The LSE-TNX combination would become fourth largest exchange in the world, with approximately $4.1 trillion in shares trading annually. But the Deutsche Börse-NYSE merger would be, by some accounts, almost four times larger by trading volume.
These deals in turn ratchet up the pressure on other exchanges. For example, BATS Global Markets and Chi-X Europe, two European electronic exchanges, are also in discussions on a merger.
No deal is certain until boards give approval and regulators give the green light, but with current global, competitive realities, the financial world is braced for a series of market merger announcements, relatively soon.