Winning Combination

Who Doesn't wish they had a crystal ball? As we enter the new year facing so many uncertainties, Wall Street is taking its best guess as to what the future of the exchanges will be, and everyone is trying to plan accordingly.

From the Jan-Feb 2006 issue of Advanced Trading

What will be the impact of the New York Stock Exchange-Archipelago merger? How will Reg NMS affect the exchanges once it is implemented (see related article, page 16)? Will the regional exchanges rise to the occasion? Will U.S.-based exchanges merge or partner with international exchanges? Will different types of exchanges, such as equities and futures exchanges, consolidate (for example, the NYSE and Chicago Mercantile Exchange, or the Toronto Stock Exchange and the Montreal Exchange)?

As each exchange scrambles to find the winning move that will set it apart, I'd bet we'll see many of these types of combinations. This is even more important now that many of the exchanges are becoming for-profit entities - the pressure is on to please shareholders and find new revenue streams.

NYSE-Arca is trying to get there by becoming an exchange for all products - bonds, futures, and listed and over-the-counter equities. The International Securities Exchange says it may add equities to the all-electronic options exchange (see cover story, page 30). Meanwhile, the Toronto Stock Exchange is eyeing futures and options (see related article, page 12).

Doug Atkin, former CEO of Instinet and now CEO of Majestic Research, an independent research firm that follows exchanges, agrees that we'll see another wave of consolidation. "The ISE could buy some of these traditional floor markets that have decent flow, like the Amex," he says. "Or it could be bought by one of the floor-based markets, or an equity market or a futures market, with a big market cap."

Atkin also expects to see the CME actively pursue an acquisition target. "They've had an incredible run and they have no debt," he says. "I think you're going to see consolidations, whether that's the Merc buying an options exchange or the Merc buying an equities exchange," he continues. "And that's just within the U.S. I think you'll also see some transatlantic combinations."

Even when management has a winning strategy, however, shareholders may not always appreciate it. When asked if the Toronto Stock Exchange would be looking at a U.S. acquisition, Rik Parkhill, president of TSX Markets, explains that the exchange tried to purchase a stake in Archipelago a few years ago, but TSX shareholders exercised their first right of refusal. "Of course, it's clear that would have been a good deal now," he adds wistfully.

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