Instead of fighting the NYSE, Nasdaq wants to own it.
Nasdaq OMX Group Inc. and another U.S.-based market, the IntercontinentalExchange Inc., submitted a joint $11.3 billion bid Friday for NYSE Euronext, the parent company of the New York Stock Exchange. The offer, which was expected, raises the possibility of a bidding war for the NYSE with Deutsche Boerse. NYSE agreed to a $10 billion deal with the German exchange operator in February.
The dueling bids for the NYSE show how intense the competition for trading in stocks, options and other investments has become. Though mergers between exchanges have little, if any, impact on small investors, they are a means for survival for these markets. Technology has driven down the cost of trading to almost nothing. Newer, smaller and more high-tech companies like the BATS Exchange and Direct Edge have emerged to give investors the opportunity to find the best price for a security in milliseconds. That has taken business away from institutions like the NYSE and Nasdaq.
"We're in the midst of a pretty fundamental reshaping of the way people trade stocks, bonds and derivatives," said Kenneth B. Marlin, managing partner at Marlin & Associates, a boutique investment bank that's done merger related work with exchanges. "This bid is a recognition that they are riding a powerful wave of change."
Moreover, stocks are becoming a smaller part of the trading business. Exchanges are making more of their money from options and the complex investments known as derviatives. In response, the world's major exchanges have been combining with one another. In February, the London Stock Exchange and the parent company of the Toronto Stock Exchange announced a $2.9 billion merger, and the Singapore Exchange and Australia's ASX revised its own $8.3 billion merger plan. The NYSE is itself a combination of several exchanges including those in Paris, Brussels, Amsterdam and Lisbon. Nasdaq OMX owns exchanges in Scandinavia as well as the Nasdaq Stock market.
There is some irony in a Nasdaq bid for the NYSE — Nasdaq once expected to defeat the company that it now wants to own. The two have a contentious rivalry that extends to 1971, the year that stocks began trading on the Nasdaq. Just last year, after the May 6 "flash crash" that sent stocks plunging, Nasdaq CEO Robert Greifield blamed NYSE for halting trades on a half dozen stocks and said that action had intensified the selling. NYSE's CEO Duncan Niederauer countercharged that Nasdaq's computers were at fault.
During the technology boom in the 1990s, Nasdaq touted itself as "the stock market for the next 100 years" and was able to get listings of the top new tech companies including Microsoft, Apple and Intel. The dot-com bust took away the exchange's cutting-edge reputation. The Nasdaq composite index, bloated by speculative buying of many small tech companies, still hasn't fully recovered from the bust and remains a symbol of the exchange's lost cachet. The index hit a high of 5,048.62 in March 2000 and is now at 2,789.60, down 44 percent. The Dow Jones industrial average is up 22 percent since then.
Under the deal proposed Friday, Nasdaq would take over the NYSE's stock trading and options business, while ICE would get its derivatives market. ICE, based in Atlanta, trades commodities including oil, sugar, coffee and cotton. It's also a market for derivatives such as credit default swaps that are used by traders and investors to offset risk in other investments.
If NYSE's deal with Deutsche Boerse is completed, Nasdaq would be left without a major exchange to bid on. But the deal is far from completed — it must still be approved by regulators. And when it was announced, there were loud complaints in Congress about an icon of U.S. capitalism having a foreign owner.
An NYSE-Nasdaq deal would also have to win approval from regulators. The creation of one big U.S. stock market would raise antitrust concerns.
Some observers believe the competition is healthy.
"We have two large markets in this country, which is pretty rare," said Richard Torrenzano, CEO of The Torrenzano Group, a crisis management firm. "It gives us opportunities for efficiencies in trading and listings that other countries do not offer and I would think that regulators would like to keep it that way." Torrenzano, who worked at NYSE, says that the deal could also run into local political trouble since the combination of two New York-based exchanges would potentially mean hundreds of layoffs.
NYSE said it will "carefully review the proposal." Deutsche Boerse said separately that it believes its deal wiith NYSE Euronext is the best possible combination for all shareholders.
Driving all these mergers is the fact that the value of the stock exchanges has diminished as improvements in technology has replaced shouting floor brokers with computers capable of matching hundreds of thousands of orders per second. Merging forces allows exchange operators to forestall competition for more profitable businesses like options trading or derivatives.
Investors have fled exchange stocks as the company's stock trading profits have fallen: NYSE's stock has lost 40 percent of its value in the last three years, while Nasdaq's shares are off 28 percent.
David Randall contributed to this report