I just finished a book on nuclear strategy in the post-Cold War era and have been planning to review it. I will still do so, probably next week, but find myself somewhat overtaken by events, as many of the points the book makes, and that I wanted to highlight, are critical to the just-announced sale of the New York Stock Exchange. Bear with me as I walk through some of them.
- Technology has empowered the little guy—little, in this case, being a relative term. IntercontinentalExchange (ICE), the buyer, was founded 12 years ago and has grown through trading commodities and derivatives. One of the first platforms to go to full electronic trading, ICE has cemented a dominant position in many markets, and the combined firm would own 14 exchanges and 5 clearing operations. The securities business has changed completely in just 12 years.
- We live in a multi-polar world. American dominance is dead. This point is a bit less clear-cut, since ICE is an American firm, but there is no reason in principle why it has to be. Although it is planning on a dual headquarters in New York and Atlanta, with its focus on electronic markets, it could be located anywhere. ICE already owns firms in London, Canada, and Brazil, while the NYSE also includes Euronext and planned to merge with the German Deutsche Börse. National boundaries are less relevant than ever.
- Higher-order effects dominate the results of immediate decisions. Just as in geopolitical strategy, where small initial decisions can cascade across the world to produce big effects, the interlinking of the exchanges and the movement of trading into the cloud takes humans out of the decision loop. We have seen this already in the “flash crash,” and the trend continues.
None of these trends is new, and the acquisition of the NYSE by ICE won’t significantly change them. It probably will accelerate them, however. The psychological impact also should not be ignored. The demise of the NYSE, one of the very visible faces of American capitalism, as an independent entity says a lot about how the U.S. will be viewed. I suspect that the combined firm will eventually retain the name, just as SBC took the AT&T name, for similar reasons, after that takeover.
The whole point of the merger is to continue to push down costs and compete with other exchanges. In that sense, the merger will be customer-positive, but it remains to be seen exactly who the “customer” is. The challenge for both the exchange operators and the regulators will be in monitoring systemic risks and staying ahead of the higher-order consequences of changes in the exchange structure, both at ICE/NYSE and other large exchanges, while at the same time preserving open access for all participants, including small investors.
In many respects, the growing centralization of exchanges in all asset classes reflects the same forces that are driving the rest of the financial industry, especially banks, in the same direction. What needs to be watched is that the exchange world doesn’t face the same consequences that we saw with the “too big to fail” banks in 2008–2009. Because of this, regulatory approval of the merger isn’t certain, although it seems likely. ICE and the Nasdaq tried to buy the NYSE last year and got shot down by regulators. By leaving out Nasdaq this time around, the bid is seen as more likely to succeed, since ICE has no U.S. equities business and plans to spin off the European equities exchanges.
Again, the world did not end yesterday, but it surely has changed. While this deal is more a recognition of change than an immediate driver of more, it will lay the groundwork for further transformation in the markets as other firms study and respond to this move.