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NYSE Considers Its Next Move

Nasdaq Stake in LSE May Push
The Exchange to Fight or Expand
Into Other Financial Arenas
April 13, 2006; Page C1

The New York Stock Exchange faces a dilemma in London.

Should the exchange, owned by NYSE Group Inc., challenge its archrival Nasdaq Stock Market Inc. in pursuit of Europe's biggest stock exchange, or make a different move to further the consolidation of the world's financial markets?

The NYSE's pickle was created by Nasdaq's purchase of a nearly 15% stake in London Stock Exchange PLC earlier this week, which gave the smaller Nasdaq a big say over the London exchange's future and a head start in making any bid.

[Robert Greifeld]

Both of the U.S.'s two biggest stock markets have made it clear they intend to be players in consolidating exchanges as investors push for easy access to a wider range of markets, including derivatives — and stock exchanges themselves feel pressure from their own shareholders to expand more aggressively.

So far, Nasdaq has stolen a march on the NYSE, first by proposing a bid earlier this year for the London Stock Exchange and then, when the proposal was rebuffed two weeks ago, snapping up a big stake Tuesday.

That 14.99% shareholding makes Nasdaq the largest investor in the LSE, and if John Thain, chief executive of NYSE, harbors any hopes of buying LSE, he's at least temporarily outmaneuvered.

The NYSE continues to be mum about its plans, except to say that it is proceeding with an offering of new stock as soon as next month. Mr. Thain does have some other options abroad, though Nasdaq's blocking share may now persuade him to seek acquisitions in the U.S. rather than overseas.

In the past, Mr. Thain has talked about deals that focus on trading derivatives, stock options and futures contracts, as well as international opportunities. That makes U.S. exchanges like the CBOT Holdings Inc.'s Chicago Board of Trade, the Chicago Board Options Exchange, the Chicago Mercantile Exchange, the International Securities Exchange or the Philadelphia Stock Exchange possible NYSE merger partners, in addition to foreign exchanges.

“There needs to be more consolidation in the U.S.,” Mr. Thain said in a meeting earlier this year at The Wall Street Journal. “The markets are still too fragmented and the products are too separated.” He added: “I think there will be consolidations between the U.S. and Europe, and I want to make sure we're positioned to play a leadership role.” An NYSE spokesman declined comment and said Mr. Thain wasn't available.

[Clara Furse]

Companies that list on exchanges aren't driving the consolidation but they do welcome deals if a merged exchange gives them a more prestigious listing, access to a greater number of investors, and potentially lower listing costs.

It is too early to tell whether Nasdaq will be able to translate its stake into an eventual acquisition of the London exchange. People familiar with the matter say they expect senior exchange executives, possibly including Nasdaq CEO Bob Greifeld and his London counterpart Clara Furse, to meet next week. But the London exchange made clear yesterday that it isn't wedded to a Nasdaq tie-up.

“The board is exploring the options available to it to create additional value for shareholders and customers, including discussions with other major exchanges,” it said in a regulatory statement without providing further details. Shares of the London Stock Exchange closed up 15% at 1,198.5 pence ($20.96) in London yesterday. Nasdaq's stock price rose 3.4% to $42.22 while NYSE's stock price fell 0.6% to $72.70. Meanwhile, the rating on Nasdaq's $825 million in bank debt was lowered one notch to Ba3 by credit rating firm Moody's Investors Service.

Nasdaq is prevented under United Kingdom takeover laws from buying any more LSE shares for another week, when it can raise its stake to as much as 24.99%.

Then it must wait a further seven days before it can take its holding to 29.99%, where it has to stay for six months after the date it withdrew its previous proposal unless a rival offer for the London exchange emerges or the LSE's board decides to recommend a sale.

The NYSE and Nasdaq are eyeing expansion from two very different vantage points. The 213-year-old Big Board lists most of the big prestigious U.S. companies in the U.S.; it has also kept its floor traders longer than most exchanges. Nasdaq grew up in the 1970s as a market of dealers connected by phone lines and has more recently prided itself on fast electronic trading that appeals to hedge funds, big mutual funds and others that want to trade quickly.

But both companies, along with other exchanges, are seeking to reinvent themselves in the face of sweeping changes in the industry.

Most stock markets and investors in the past have been defined and constrained by national boundaries and in what they trade. But as more stock trading becomes electronic, investors can tap into stock exchanges and other financial markets anywhere in the world.

That has provided an incentive for exchanges to allow the widest possible access to their systems. The Chicago Merc, for instance, which was founded as a local market for commodities trading more than 100 years ago, now allows investors world-wide to trade financial futures and other derivatives 24 hours a day. Stock exchange operators also have found they can save costs by buying up rival exchanges and adding more volume to their existing trading platforms.

Already in Europe, Euronext NV runs the stock exchanges in Paris, Amsterdam, Brussels and Lisbon.

Euronext, which is based in Amsterdam but operates from Paris, is another possible partner for the London Stock Exchange, as is OMX AB, a Swedish operator of stock exchanges in Scandinavia and the Baltics.


“It's a feature of the globalization of markets: Trading is increasingly a global business and the ownership of shares is increasingly global,” said Leigh Harrison, head of U.K. retail funds at Threadneedle Asset Management Ltd. “The share trading platforms had to adapt to the participants, they had to be bigger.” London-based Threadneedle, a unit of Ameriprise Financial Inc. of the U.S., was London Stock Exchange's biggest shareholder until it sold its stake to Nasdaq earlier this week.

Trading volumes put through exchanges in recent years also have soared because more big investors are programming computers to do their trading for them, rather than relying on human input. The computers, known in the industry as “black boxes,” often engage in trading strategies that involve multiple trades, rather than simply buying or selling a few stocks as most individual investors still do.

For instance, computers can compare the differences in price of a stock listed on both the Frankfurt Stock Exchange and the New York Stock Exchange such as Deutsche Bank, while continuously comparing these to historical price developments and intraday trading trends.

“In the past four years, the volume of trading on exchanges conducted by Credit Suisse globally has risen about 10 times. We are expecting it to quadruple this year alone,” said Tom Sanzone, chief information officer Credit Suisse, the big Swiss bank. “The key driver of volume is computer-based trading strategies.”


Exchanges that have the technological capacity to handle this trading have grabbed huge business — and it helps explain why the London Stock Exchange is such an attractive target. Since the exchange recently upgraded its electronic trading platform, known as SETS, trading has soared: Between January and March, the average daily number of trades on SETS rose by 38% compared with the same period the year before. Among the biggest companies traded on the LSE are banking giant HSBC Holdings PLC, cellphone company Vodafone Group PLC, and oil major BP Group.

Separately, derivatives — instruments based on an underlying security, index or interest rate — have moved into the financial mainstream in the past decade. Most of them remain traded between big banks and away from formal exchanges. But exchange operators such as the Chicago Merc are rapidly expanding derivatives trading.

That push has been especially strong in Europe, which helps explain why Europe's exchange industry is now the epicenter of global consolidation. Euronext, for instance, isn't just the exchange that lists the shares of oil giants Total SA and Royal Dutch Shell PLC. In 2002, it purchased the London International Financial Futures and Options Exchange, one of the world's biggest derivatives exchanges. LIFFE represented 35% of Euronext's 2005 revenue of €962 million ($1.17 billion), while cash trading in stocks accounted for just 23%. (The rest came from other operations Euronext runs such as a clearing operation that settles trades.)

The London Stock Exchange doesn't have a separate derivatives trading platform, making Euronext in some ways a more attractive prospect for NYSE. But Euronext itself is in the throes of a takeover tussle that could make it difficult for NYSE to step in.

Euronext CEO Jean-François Théodore is being pushed by some U.S. and U.K. hedge funds that own a big chunk of Euronext stock to merge with Deutsche Börse. Deutsche Börse AG, based in Frankfurt, operates the Frankfurt Stock Exchange and the Eurex derivatives exchange. Deutsche Börse has said Euronext is its preferred partner and is being encouraged by the same group of hedge funds, which also hold Deutsche Börse shares.

In a bid to keep his options open, and buy time ahead of a shareholders' meeting on May 23, Mr. Théodore and Euronext officials have repeatedly said they are willing to hold constructive talks with Deutsche Börse. But they say they also are exploring other options, which they haven't identified. Among the frequently mooted possible partners: NYSE, London Stock Exchange and the Chicago Merc.

Craig Donohue, the Merc's chief executive, declined to comment on specific plans, but says merger talks across the industry have picked up as for-profit exchanges look for new ways to expand and diversify. Exchanges' customers, many of whom also have merged in recent years, encourage the trend, too. “There's been a strong desire to see improved efficiencies,” Mr. Donohue says.

Write to Aaron Lucchetti at [email protected], Edward Taylor at [email protected], Charles Fleming at [email protected] and Alistair MacDonald at [email protected]

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