Cutting Jobs
"In Exchange 101, it's about operating leverage," said Jamie Selway, managing director at Investment Technology Group Inc. in New York and an expert in how markets are organized. He said NYSE Euronext and Deutsche Boerse can combine and eliminate more costs in personnel and technology. "You spend a fixed amount of cost to operate platforms. Anything additional you can trade on them is incremental revenue."
NYSE and Deutsche Boerse may move to a single execution system, coordinating trading services and eliminating jobs in areas such as sales, marketing and computer support. The combined exchange will use NYSE Euronext's trading system for cash equities, said a person familiar with the matter who declined to be identified because the talks are private.
Options Volume
The deal would give the combined company about 40% of U.S. options volume by adding NYSE Euronext's two markets with the ISE, currently the third-largest venue. CBOE was the biggest options exchange operator last month with 30% of contracts handled on its venues.
Combined, the companies will be the world's largest futures market by volume, according to data from the Futures Industry Association, a trade group representing Wall Street banks active in derivatives. The merged firm would control 11 derivatives markets, including Liffe U.K., NYSE Arca Options, NYSE Liffe U.S., Eurex and the International Securities Exchange. The combined venues would have posted volume of 4.8 billion contracts in 2010, according to FIA.
That compares to 3.1 billion trades last year at CME Group Inc., the world's largest futures exchange, FIA said.
NYSE Euronext would also handle clearing, the guaranteeing of payments for transactions and delivery of securities, for equities and futures in Europe through businesses run by Deutsche Boerse. Combining products in the same clearinghouse limits the ability of other markets to compete.
"Expanding a good, modern system that already exists like NYSE costs very little," said Alfred Berkeley, chairman of Pipeline Trading Systems LLC in New York and president of Nasdaq Stock Market from 1996 to 2000. "They can eliminate all that redundancy in Deutsche Boerse and do a lot more business and a lot more trades than they're doing now."