August 15, 2006

If you think the NYSE-Euronext linkup is only about creating synergies between the U.S. and European securities and derivatives markets, then you are mistaken. The cross-border merger and resulting technology consolidation are aimed to set the stage for a broader alliance of international exchanges, based on the federal model that Euronext practices.

One reason Euronext has been so successful in acquiring the Amsterdam, Belgian, Paris and Lisbon stock exchanges, as well as London's derivatives exchange, Liffe, is that it's been able to integrate disparate trading platforms and cut IT costs without disturbing the independence of each underlying exchange. This federal model could enable the NYSE Euronext holding company to operate many different exchanges while allowing each exchange to continue to operate independently under the regulatory framework of its home country.

It is this winning formula for IT integration coupled with access to international listings and expansion into the fast-growing derivatives business that attracted NYSE Group to the merger. "The secret of the deal [revolves around Euronext's] federation philosophy," says Andre Cappon, president and cofounder of CBM Group, a general management consultancy that has worked on technology projects for several exchanges. "Rather than somebody really taking over somebody else," the underlying exchanges continue to run their own business models, relates Cappon.

Already, the Italian exchange, Borsa Italiana, has been in talks with Deutsche Borse and Euronext about joining forces. And there are rumors that the NYSE-Euronext alliance could expand to Asia, taking in the Tokyo Stock Exchange, among other venues. When the dust settles, the global consolidation of stock and derivative exchanges could result in two or three dominant networks of exchanges, suggests Cappon. Nasdaq, the London Stock Exchange and the Deutsche Borse could form their own federation; another could include Spain, Mexico, Canada, Brazil and Australia, he offers. "To make the federation possible, you want to be open architecture and accept everybody," Cappon says.

But even if the NYSE Group manages to pull together all the technology and achieve the cost savings, there still are other challenges to tackle. "The major problem they're going to have is integrating the regulation, because you're going to have different sets of rules to be listed," says Peter Driscoll, SVP and senior trader at The Northern Trust Co. in Chicago.

Skirting SOX

Still, many sources say the real value in the merger with Euronext is that it allows the NYSE to get back into the global listings business without falling under Sarbanes-Oxley. "They wouldn't have to list technically in the U.S.," contends Cappon. "NYSE Euronext is a global platform. The European stocks would be listed in Paris and maybe some American stocks would be listed in Paris, too," to avoid U.S. regulation, the consultant predicts.

However, there still is debate over whether a European listing could be traded in the U.S. without the company being subject to SOX. Some think NYSE Euronext could pull off what's known as regulatory arbitrage, capitalizing on the softer European regs to compete for listings. "Thain could tell regulators that NYSE Euronext is a global platform and that the [European] regulators are still watching," says Cappon, implying that U.S.-based oversight would be redundant.

While this issue won't be settled until the regulators weigh in sometime this year, we can expect more exchange consolidation. Building economies of scale, sharing IT and enhancing listings will take precedence over legal wrangling.

Ivy Schmerken is a 20-year WS&T veteran. As Editor-at-Large, she covers trading for both Wall Street & Technology and Advanced Trading. ischmerken@cmp.com

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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 ...