Friday, December 21, 2012

Bye Bye New York Stock Exchange

OK - the title is pure hyperbole. The New York Stock Exchange (NYSE) is going nowhere. But the company that owns NYSE is just being bought over. The curious part of the story is that the acquirer does not really want the NYSE, but it comes as part of the package- so he has to take it !

Here's the deal. NYSE is part of a conglomerate called NYSE Euronext. The conglomerate consists of NYSE itself, Euronext, which is a combination of three European stock exchanges and Liffe which is a London based derivatives exchange. NYSE and Euronext are ugly spinsters nobody wants. The beauty amongst the beasts is Liffe. For it is the sexy new hottie - a derivatives exchange.

And therein lies the story. In the modern day casino , that is finance , equity exchanges like NYSE are worthless as businesses. Margins are supposedly low. Stock exchanges are the places where almost all companies that require capital list and that's where investors channel their savings into productive investment. One would have thought that  the raison d'être for financial markets was to fulfill that objective, but obviously I am an old foggie.

In today's world, the money is all in running commodities exchanges,  derivatives markets etc - not boring old equity. The acquirer is a company called ICE that did not exist before 2000 (for the record NYSE was founded in 1817). ICE purely handles derivatives trading. The career of Jeffrey Sprecher, the CEO of ICE says it all. He started his career building power plants.  But he realised that there was more money (in facts tons more money) playing on financial contracts relating to power than in generating power itself. So he started ICE , obscurely in Atlanta, in 2000. See where he has got to in 12 years.

We've now come to a stage where even the NYSE is an unattractive prize - in fact positively repellant. Given a choice Mr Sprecher would probably spin off NYSE, or sell it off somewhere or simply forget about it. Unfortunately that is politically simply unthinkable. So he has to live with it and make pious noises of how important it is.

Its a symptom of where the world is going.  This post is one sided and biased (whoever said that a blog has to be objective !). Derivatives markets are not all evil and equity markets are not all saints. Both serve useful economic purposes. But you can see where this is headed. Esoteric, ununderstandable financial structures are getting to be more important than the underlying asset itself. That's why, a wise old fox from Omaha, back then in 2003, called derivatives a weapon of mass destruction.

Many years ago, when the world was a simpler place and when this blogger was a young man (!), he went to 11 Wall Street, entered the visitors gallery of NYSE and gazed at the trading floor in awe.  Little did he know that not in the too distant future, this lovely lady was going to be thrown out into the street as an ugly old crone.