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The End of an Era for the NYSE?

NYSE merger talks with Deutsche Borse are a sign of the waning influence of Wall Street and physical exchanges in global financial markets.

The New York Stock Exchange, a symbol of American capitalism for more than 200 years, may soon need to change the U.S. flag draped over its neoclassical facade to one that represents its new German owners.

The exchange, owned by NYSE Euronext, on Wednesday, said it was in advanced talks with Deutsche Borse, operator of the Frankfurt Stock Exchange and Eurex, one of the world's largest listed-derivatives markets.

The deal, if completed, would create the largest financial market on the planet with a presence in 14 European countries as well as in the United States.

"A merger would potentially let customers trade stocks in New York, options tied to those shares in Paris and derivatives linked to them in Frankfurt," says the New York Times today.

The NYSE would still have a headquarters in Manhattan. But the Deutsche Borse would own as much as 60 percent of the new company, which would be incorporated in the Netherlands, according to media reports.

The deal reflects the globalization of financial markets and the fact that trades are executed 24 by 7 across borders and asset classes via low-latency networks.

So, is the deal good for Wall Street?

For some observers the potential merger is a sign of the waning influence of Wall Street and bricks and mortar exchanges and the shift to electronic trading, reports New York Magazine. In the article, a retired NYSE trader calls it "the end of an era." While trading began with brokers standing under the buttonwood tree in 1742, today shares are bought and sold via computerized algorithms in places like Jersey City and Kansas City.

The NYSE has made several acquisitions, namely Archipelago to get the electronic platform, and the American Stock Exchange, which brought a hybrid options market to the NYSE floor.

Since merging with Paris-based Euronext in 2006, the NYSE has undergone a transformation from an auction-based floor with specialists to an electronic system catering to a new breed of electronic market makers called streaming liquidity providers. Recently, it dropped the role of 'specialists' and renamed them designated market makers. The exchange floor is much quieter and there are fewer people, 1,300 equity and option traders as compared to 3,000 a decade ago, notes the New York Times.

As traditional exchange operators, both NYSE and Deutsche Borse face competition from upstarts such as BATS Exchange and Direct Edge, as well as electronic platforms like Chi-X in Europe, which have captured volume from traditional exchanges. While NYSE Euronext and Deutsche Borse exchanges held merger talks in 2008 and 2009, they resumed talks late last year.

The New York Times says that $411 million in expected cost savings is expected to come from combining the two companies' technology systems and back-office operations. Fewer than 1,000 job cuts are expected, with less than 100 in New York, according to an unnamed source.

If a deal is reached, however, it could still face several hurdles, including regulatory and political resistance.

New York City political leaders want the city to maintain its status as the leading financial capital. But already the NYSE has opened a data center in Mahwah, New Jersey and Baseldon, England to offer colocation services to brokers, hedge funds and proprietary trading firms that want to be closer to the exchange's matching engine. So will New York's political leaders, such as Sen. Charles Schumer, oppose the takeover deal or place hurdles in the way? That remains to be seen.

Another unanswered question is what they would call the merged exchange and will its German owner gain top billing. Deutsche Borse NYSE Euronext doesn't exactly roll off the tongue.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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