Intercontinental Exchange's bid to take over the New York Stock
Exchange illustrates how trading in commodities and derivatives has
become much more lucrative than trading in the shares of companies.
On a warm day in Boca Raton, Florida, the host of a reception for
an annual financial conference was not a big bank or a powerful
exchange, as in years past, but a young company based in Atlanta.
Guests who gathered at the oceanfront resort were surprised. They
were greeted with bottled ice water that carried the company's logo,
and as they left, they were invited to grab iPod Shuffles.
That event, four years ago, was the Wall Street equivalent of a
coming-out party for the company, IntercontinentalExchange, or ICE,
an electronic operator of markets for derivatives and commodities.
Now, the market upstart is announcing itself to a much larger world
with an $8.2 billion deal to buy the symbolic cradle of American
capitalism, the New York Stock Exchange.
The takeover illustrates starkly how trading in commodities and
derivatives has become much more lucrative than trading in the
shares of companies. Warren E. Buffett warned in 2003 that the
"derivatives genie is now well out of the bottle," and that the
genie, even after a global financial crisis, was not going back.
Currently, derivatives -- financial bets tied to underlying assets
like oil prices or interest rates -- are a $600 trillion market.
Even the parent of the N.Y.S.E. attracted its suitor largely because
of its ownership of Liffe, a major derivatives exchange in London.
For many, the Beaux-Arts New York Stock Exchange building, and
images of traders looking despondent or exuberant on its floor,
represent what making money is all about. Yet Wall Street itself has
found it more profitable to bet on fluctuations in the prices of
natural gas or corn or on interest rates. The financial industry
often does so electronically and through platforms in cities as
scattered as Atlanta, Chicago and London. The biggest bonuses each
year are typically for traders who reaped rich gains on these often
complex financial products.
That change, decades in the making, has left the New York
exchange, with roots going back 220 years, in an increasingly
difficult position as trading volumes slump and profit margins stay
razor-thin. While its acquirer has pledged to keep a dual
headquarters in the exchange building in New York, as well as in
Atlanta, the center of power in finance long ago migrated elsewhere.
The success of the newly combined companies hinges on the
derivatives business. ICE is hoping that a greater share of
derivatives trading will go through its clearinghouse operations,
which act as backstops in case one party defaults. It is being aided
by the Dodd-Frank financial regulatory overhaul, which is requiring
Wall Street banks to push their derivatives trades into
clearinghouses and regulated exchanges.
"For the past decade, our solutions made our markets increasingly
electronic and increasingly clear," Jeffrey C. Sprecher, chief
executive of ICE, said this month. "Today, financial reform is
imposing that vision on many markets through a rule-making process."
While Dodd-Frank compliance is still in its early days, and the
volume of derivatives trading remains depressed amid broader
economic uncertainty, the law is ultimately expected to cement ICE's
business model into the regulatory code.
"Despite the complaints, there's no question that at the end of
the day, Dodd-Frank will be a financial boon to exchanges," said
Bart Chilton, a Democratic member of the Commodity Futures Trading
Commission, which regulates derivatives.
Still, such a development will not do much for the traditional
business of the New York Stock Exchange. Mr. Sprecher said Thursday
that he was committed to keeping the floor of the exchange open. But
according to people briefed on his plans, he intends to use the
stock trading operation and its steady cash-generating abilities to
finance future deals and expansion efforts. …