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“This is an important development in the history of the NYSE, Euronext and the global
capital markets. A partnership with Euronext fulfills our shared vision of building a truly
global marketplace with great breadth of product and geographic reach that will benefit
all investors, issuers, and our shareholders and stakeholders.” 2
INTRODUCTION
In June 2006, New York Stock Exchange Group Inc. (NYSE), a leading stock exchange
company in the US, announced a merger with Euronext N.V. (Euronext), a cross-border
stock exchange organisation in Europe. The transatlantic merger was set to create the
world’s most liquid and global financial marketplace and intended to offer unmatched
benefits for investors and issuers across the globe. The combined company would be
the largest exchange in the world with a market capitalisation of $21 billion and an
average daily turnover of $100 billion. The strategic partnership brought together two
industry leaders on a common platform and established market leadership position in
diverse businesses like cash equities, derivatives and futures, listings, bond and market
data. The merger also aimed to reduce operating costs through cost and revenue
synergies. John A. Thain (Thain), CEO of NYSE commented, “We are combining two
great companies. In today’s marketplace, it’s not enough to simply be a leader in the
United States. It’s not enough simply to be the champion in Europe. It really is important
to be a global competitor.” 4
1
“NYSE Group and Euronext N.V. agree to a merger of equals”, www.nyse.com, June 1st 2006
2
Ibid
3
“NYSE Group and Euronext announce merger”, www.nyse.com
4
“NYSE Group and Euronext announce merger”, op.cit
This Case was written by Bose S, IBS Research Center. It is intended to be used as the basis for class discussion rather
than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published
sources.
In early 1800s, NYSE began to grow steadily and in 1817, a constitution incorporating all
the rules and regulations was formed to deal with the impending complex functions. The
organisation was given a formal name of New York Stock & Exchange Board, but was
later rechristened as New York Stock Exchange in 1863. In 1865, it moved to a
permanent location in the Broad Street in the US and gradually implemented the
continuous trading system in 1872. By 1886, about a million shares were traded per day.
In 1896, the Wall Street Journal began publishing the Dow Jones Industrial Average and
eventually it became an overall indication of NYSE’S daily performance.
Throughout the 1900s, NYSE developed into a leading stock exchange in the world,
trading stocks from blue chip companies to new high growth emerging companies. The
exchange was registered as a national securities exchange under the US Securities and
Exchange Commission (SEC) in 1934. NYSE operated traditionally as a continuous
auction floor trading. Exchange members interested in transacting shares gathered
around a specific place on the trading floor, where a specialist broker acted as an
auctioneer in an open outcry auction market setup. The specialist brokers were
employed by investment firms and not by the NYSE. The job of the specialist was to
accept buy and sell orders from brokers and manage the actual auction, ensuring
market for specified stocks at all times. The specialists also facilitated trade by
disseminating information to the crowd and brought buyers and sellers together on the
same platform.
However, the floor-based trading system of NYSE was facing intense competition from
NASDAQ and other Electronic Communication Networks (ECNs) 5 in the late 1990s.
NYSE was also plagued by a series of setbacks when its former CEO and Chairman
Dick Grasso was accused of receiving extremely high compensation. The SEC also
launched an investigation against some specialist firms, who allegedly cheated investors
and traded for their own accounts first. It was supposedly one of the largest enforcement
actions against stock exchanges in the US. NYSE was forced to restructure its
management to bring in a person who could bring order and stability in the company and
Thain was made the Chief Executive. In the meantime, the entire stock market was
gradually evolving from the floor trading system to the electronic trading system. Several
NYSE-listed companies were found to have requested dual listings on both NASDAQ
and NYSE to increase the probability of faster trading. Information leakage and fear of
manipulation of quotes by intermediaries also led to an altogether distrust on the floor-
based system.
5
ECN is a computerised, private financial trading system that provides off-exchange platforms for
trading securities.
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The traditional floor-based operations of NYSE were hailed by most of the investors as
less effective and efficient than electronic models. While NASDAQ and other ECNs had
computer algorithms that matched buy and sell orders at the best price within 1 second 6 ,
at NYSE it required an average response time of 18 seconds, as the orders were routed
through the DOT 7 system to the specialist firms.
By the end of 2005, NYSE became a publicly held company through a merger with the
electronic stock exchange of Archipelago Holdings. The new exchange was set to be a
hybrid model, utilising both floor and electronic trading and marked a strategic move by
the company to compete with all-electronic exchanges across the globe. The merger
between NYSE and Archipelago was supposed to transform NYSE into a for-profit,
publicly traded enterprise. The new entity was renamed as NYSE Group Inc. while the
regulatory arm of NYSE became a separate not-for-profit organisation [Exhibit – 1]. The
merger aimed to create new opportunities for NYSE Group by expanding its trading in
new business areas like options and equity derivatives market. This was made possible
through ‘The ArcaEdge’, the trading platform of Archipelago that provided fast electronic
execution, transparency and open market access for trading of equity securities. The
merger also improved NYSE’s ability to complete trades faster through the electronic
facilities of Archipelago and thus enhanced its credibility, especially when the regulators
brought in changes in securities laws favouring electronic trading entities. The SEC
approved the Regulation National Market System 8 [Annexure – 1] to permit stock traders
to accept the best bid or offer available for a particular stock, irrespective of which stock
exchange had posted it. Customers were allowed to go to any market to complete
trading as fast as possible and the electronic trading system of Archipelago enabled
NYSE to offer such fast deals. William Donaldson, the chairman of SEC, remarked, “It
(the merger) seems to me to be a positive development for investors, illustrating just
how aggressive the markets will become in competing with one another now that
securities trading laws have been altered.” 9
With the merger, NYSE continued market share gains in trading NASDAQ-listed
companies and registered a net income $40.8 million in fiscal 2005 [Exhibit – 2]. During
the first quarter of 2006, the global market capitalisation of listed companies in the NYSE
increased to $22.3 trillion [Exhibit – 3]. The average daily trade during the same period
was $4.5 million [Exhibit – 4], with an average daily turnover of $86.3 billion [Exhibit – 5].
NYSE registered revenues of $429 million in the first quarter of 2006, bulk of which was
accounted by the transactions of the exchange [Exhibit – 6]. The pre-tax margin of the
company during the same period was 21.8% [Exhibit – 7].
EURONEXT
Euronext was the first cross-border exchange in the world and the largest cash equities
exchange in Europe. Formed in September 2000 with the merger of the local exchanges
of Amsterdam, Paris and Brussels, Euronext consolidated the financial markets by
integrating local intermediaries across Europe [Exhibit – 8 and Exhibit – 9]. It acquired
LIFFE 10 and the Portuguese exchange (BVLP) 11 in early 2002 and aimed to generate
6
Schmerken, Ivy “Changing the Rules of the Game”, www.wallstreetandtech.com, February 12th
2004
7
DOT or Designated Order Turnaround system refers to an electronic system that routes orders for
listed securities directly to specialist firms on the trading floor instead of routing through a broker.
8
Regulation National Market System is an update of the existing Exchange Act rule of the US that
governs and regulates the US Stock Exchanges.
9
“NYSE to merge with Archipelago”, http://economictimes.indiatimes.com, April 21st 2005
10
LIFFE (London International Financial Futures and Options Exchange) was a derivative market
based in London.
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synergies by incorporating the individual strengths and assets of each local market.
Euronext operated in the Cash and Derivatives markets in Belgium, France, the UK,
Netherlands and Portugal and created a pan-European platform through a horizontal
market model [Exhibit – 10].
Euronext created harmonised IT platforms for cash trading (NSC), derivatives (LIFFE
CONNECT) [Exhibit – 11] and clearing, and consequently, every market participant had
a single point of access to trading. During the completion of the first phase of its market
consolidation and IT integration, Euronext also diversified its sources of revenues to
protect itself against fluctuations in the financial markets. In 2004, it increased its stake
in GL TRADE, the world’s leading provider of front to back-office trading, clearing and
settlement solutions. In 2005, it created the Atos Euronext Market Solutions, an IT
services-related joint-vehicle between Euronext and Atos Origin, a leading global
provider of technology services to the capital markets. In the same year, it acquired, in
partnership with Borsa Italiana 12 , a major stake in MTS, the leading electronic market for
European wholesale fixed income securities. By investing in complementary businesses,
Euronext broadened the range of services offered to its customers [Exhibit – 12].
The merged company would follow a federal cash market system, under which
companies would be able to float their shares on Euronext markets without complying
with the US corporate governance standard. NYSE-Euronext would be a US holding
company [Exhibit – 19], with its shares listed on the NYSE being traded in dollars, and in
euros on Euronext Paris. Its US headquarters would be located in New York, and its
international headquarters in Paris and Amsterdam, with London as the centre for its
derivatives business. NYSE-Euronext as a group would not have the regulated
exchange status and would be regulated by the national authorities of the individual
countries.
11
BVLP (Bolsa de Valores de Lisboa e Porto) was the Portuguese exchange.
12
Borsa Italiana is Italy’s main stock exchange.
13
EBITA Margin: EBITA/Revenues
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The new company would enable the investors to transact seamlessly across continents
and time zones. NYSE-Euronext would cover more time zones than any other exchange
group and would trade in two of the world’s main currencies, making it easier for
investors to trade securities listed on any of the seven exchanges. The strategic
partnership would create the world’s largest and most liquid securities marketplace with
a combined market capitalisation of around $21 billion. The average daily trading value
of NYSE-Euronext would be $100 billion [Exhibit – 20], with market capitalisation of the
listed companies being $26.9 trillion [Exhibit – 21]. The combined company would list the
largest number of global companies [Exhibit – 22] and have the broadest global
exchange product offering [Exhibit – 23 and Exhibit – 24].
In the first quarter of 2006, NYSE registered revenues of $453 million, while Euronext
registered $343 million [Exhibit – 25]. The company expected to expand the combined
revenue base by an estimated $100 million over a three-year period by capitalising on its
market leadership position in cash equities, listings and derivatives markets. It also
aimed to create new products with global reach, increase its share of international
listings and strengthen its competitive position in the US equity derivatives market. The
merger enabled both the companies to have significant cost and revenue synergies.
Pre-tax annual cost and revenue synergies were estimated at $375 million, of which
approximately $250 million were expected to come from the streamlining of the IT
systems and platforms. Over a span of three years from 2006, the new company
planned to have IT infrastructure cost savings by consolidation of the networks and
reduction of globally linked data centres [Exhibit – 26]. NYSE-Euronext further planned
to achieve considerable expense synergies through integration of the support functions
[Exhibit – 27] and revenue synergies through cross-selling activities across a single
platform [Exhibit – 28].
However, the transatlantic merger between the two companies raised some
speculations about possible political conflicts between the US and Europe, especially
against the French protectionism. With 50% ownership of the combined company being
controlled by foreign interests outside the US, the merger also risked vulnerability to
market interruptions and strained relationship with the European countries. Furthermore,
analysts were of the view that NYSE-Euronext would be more burdened with the
integration issues of the two companies and would be less nimble and creative than
other exchanges. They also criticised NYSE of using the merger as a platform to
circumvent the Sarbanes-Oxley Act [Annexure – 2], the US compliance legislation,
whose stringent conditions reduced the number of listings in the US. Estimates revealed
that while nine of the world’s ten largest IPO’s (Initial Public Offering) took place in the
US in 2000, only one took place in 2005. An analyst remarked, "The NYSE is not buying
a foreign exchange; the NYSE is buying a foreign jurisdiction." 14
Thain refuted these allegations and asserted, “This (the merger) can further enhance
relations between the US and Europe." 15 An analyst also opined, "A lot of companies in
emerging markets are put off by the cost of listing in the United States but with a brand
like the NYSE with Euronext, they are likelier to come to Europe instead." 16 Thain further
argued that the merger was necessary in an environment where market consolidation
was rapidly gaining momentum. Its rival NASDAQ acquired 25% stake in London Stock
Exchange in May 2006 and NYSE’s move was deemed as a response to sustain the
14
Clary, Isabelle “NYSE and Euronext agree to 'merger of equals'”, www.financialnews-us.com, June 2nd
2006
15
“NYSE-Euronext merger 'a blow against French protectionism' “, http://news.independent.co.uk,
June 3rd 2006
16
Kanter, James “Questions for Europe as exchanges combine”, www.iht.com, June 13th 2006
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competition. The merger also reduced the barriers between corporate Europe and
America and increased the transatlantic flow of capital. An analyst remarked, “When
transactions costs fall, Americans will start holding a larger percentage of their
investments in foreign securities, and vice versa. This merger, in and of itself, will not
lead to a huge revolution. But it's a first step. We're moving in the direction of a more
globally integrated securities market, where you would expect it would produce more
diversified portfolios -- in other words, less home bias, and more capital flows." 17
Exhibit – 1
The Organisational Structure of NYSE
Exhibit – 2
Revenues of NYSE (in $million)
1,123.1 1,089.5
Expenses 1,031.4 1,042.5
17
Masters, A. Brooke and Blustein, Paul “NYSE in Europe?”, www.washingtonpost.com, June 11th
2006
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Exhibit – 3
Market Capitalisation of NYSE-listed companies as of April 2006 (in $trillion)
Exhibit – 4
Average Daily Trade of NYSE as of April 2006 (in $million)
nd
Source: “Creating the Global Exchange”, http://clients.dbee.com, June 2 2006
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Exhibit – 5
Average Daily Turnover of NYSE as of April 2006 (in $billion)
Exhibit – 6
Composition of the Revenues of NYSE in first quarter 2006
Total NYSE Group Revenues = $429 mm / €334mm
Data
Processing, 9%
Regulatory,
10%
Transactions,
40%
Market Data,
14%
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Exhibit – 7
Pre-tax Margin of NYSE
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Exhibit – 8
Brief History of Euronext
September 2000
The exchanges of Amsterdam, Brussels and Paris merge to form Euronext N.V., the first cross-
border exchange in Europe, headed by a Dutch holding company.
January 2002
Euronext expands by acquiring LIFFE (London International Financial Futures and Options
Exchange).
February 2002
Euronext continues to grow and merges with the Portuguese exchange BVLP (Bolsa de Valores
de Lisboa e Porto).
December 2003
London Clearing House and Clearnet merge to create LCH.Clearnet, Europe’s leading provider
of clearing and central counterparty services.
November 2004
The integration of Euronext’s markets is completed. Euronext now uses a single platform for cash
products (NSC) and a single platform for derivatives products (LIFFE CONNECT®).
July 2005
Atos Euronext Market Solutions, a 50:50 IT services-related joint-vehicle between Euronext and
Atos Origin, is created to manage Euronext’s two cutting-edge trading platforms: NSC and LIFFE
CONNECT®, which were previously the responsibility of AtosEuronext and LIFFE
MarketSolutions, respectively.
November 2005
A major stake in MTS, the leading electronic market for European wholesale fixed income
securities, is acquired through MBE Holding, a 51:49 joint-venture between Euronext and Borsa
Italiana.
Source: www.euronext.com
Exhibit – 9
Acquisitions and Mergers of Euronext
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Exhibit – 10
Horizontal Market Model of Euronext
Exhibit – 11
Integration of Euronext
Exhibit – 12
Business Portfolio of Euronext
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Exhibit – 13
Revenues of Euronext
Exhibit – 14
EBITA Margin of Euronext
th
Source: “2005 Full Year Results”, www.euronext.com, March 14 2006
Exhibit – 15
Revenue Composition of Euronext in 2005
Other Incom e,
2.20% MTS, 0.10%
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Exhibit – 16
Average Daily Trades of Euronext as of April 2006 (in $million)
Exhibit – 17
Average Daily Turnover of Euronext as of April 2006 (in $billion)
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Exhibit – 18
NYSE-Euronext: The Multi-Product Global Exchange Group
Exhibit – 19
Organisational Structure of NYSE-EURONEXT
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Exhibit – 20
Average Daily Trading Value of NYSE-Euronext (in $billion)
Exhibit – 21
Market Capitalisation of NYSE-Euronext listed companies as of April 2006 (in
$trillion)
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Exhibit – 22
Total Number of Global Companies listed in NYSE-Euronext
Exhibit – 23
Diversified Product Offerings of NYSE-Euronext
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Exhibit – 24
Combined Revenue Composition of NYSE-Euronext
Other , 6%
Derivatives, 17%
Sale of Sof tw are, 17%
Regulatory, 6%
Exhibit – 25
Combined Revenues of NYSE-Euronext by Products as on 1st Quarter 2006
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Exhibit – 26
IT Infrastructure Cost Savings
Exhibit – 27
Expense Synergies of NYSE-Euronext
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Exhibit – 28
Revenue Synergies of NYSE-Euronext
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Annexure – 1
Regulation National Market System (NMS)
1. Trade-Throughs
• Regulation NMS would establish a uniform trade-through rule for all market centers that
would affirm the fundamental principle of price priority, while also addressing problems
posed by the inherent difference in the nature of prices displayed by automated markets,
which are immediately accessible, compared to prices displayed by manual markets,
which are not.
• At the same time, the proposal would include two exceptions to the general trade-through
rule.
• First, a market center would be allowed to execute an order that trades through a better-
priced bid or offer on another market center if the person entering the order makes an
informed decision to affirmatively opt out of the trade-through protections. Informed
consent would need to be given on an order-by-order basis. This exception is designed
to provide greater flexibility to informed traders while preserving the average customer's
expectation of having his or her orders executed at the best price.
• Second, an automated market - one that provides for an immediate automated response
to incoming orders for the full size of its best displayed bid or offer, without restriction -
would be able to trade through a better displayed bid or offer on a non-automated market
up to a de minimis amount of one to five cents, depending on the stock's price. This
exception reflects the comparative difficulty of accessing market quotes of non-
automated markets.
• The proposed trade-through rule would not change a broker-dealer's existing duty to
obtain best execution for customer orders.
2. Intermarket Access
Non-Discriminatory Access
• Regulation NMS would establish a uniform market access rule that would help assure
non-discriminatory access to the best prices displayed by market centers, but without
mandating inflexible, "hard" linkages such as the Intermarket Trading System (ITS).
• At its core, the proposal would prohibit a market center from imposing unfairly
discriminatory terms that prevent or inhibit any person from accessing its quotations
indirectly through a member, customer, or subscriber.
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Quote Standardization
• Regulation NMS also would establish an access fee standard. This standard - designed
to promote a common quoting convention - is intended to harmonize quotations and
facilitate the ready comparison of quotes across the national market system.
• The proposal would establish a de minimis fee standard for all market centers and
broker-dealers that display attributable quotes through SROs. Specifically, access fees
would be capped at $0.001 per share, and the aggregation of this fee would be limited to
no more than $0.002 per share in any transaction.
• Finally, the proposed rule would require each SRO to establish and enforce rules
requiring its members to avoid - and prohibiting them from engaging in a pattern or
practice of - locking or crossing the markets.
3. Sub-Penny Pricing
• Regulation NMS would ban sub-penny quoting in most stocks. Specifically, it would
prohibit market participants from accepting, ranking, or displaying orders, quotes, or
indications of interest in a pricing increment finer than a penny in national market system
stocks, other than those with a share price below $1.00.
• This proposal is intended to prevent sub-penny pricing from being used by some market
participants to "step-ahead" of customer limit orders for an economically insignificant
amount. This "sub-pennying" could, over time, discourage investors from placing limit
orders, which are an important source of market liquidity.
4. Market Data
• Regulation NMS would amend the existing arrangements for disseminating market data
in order to better reward SROs for their contributions to public price discovery, as well as
implement most of the recommendations of the Commission's Advisory Committee on
Market Information.
• Under existing rules and joint industry plans, the trades and best quotes in thousands of
listed and Nasdaq stocks are made available on a real-time and consolidated basis.
• The proposal would replace the current plan formulas for allocating revenues derived
from market data fees to the SROs, which are based solely on the number of trades or
share volume reported by an SRO. This method of allocation has led to serious
economic and regulatory distortions, creating incentives for "print" facilities, "wash"
trades, and "shredded" trades. In addition, those markets that generate the highest
quality quotes (i.e., the best prices and the largest sizes) are not necessarily rewarded.
• In general, the proposed new formula would divide market data revenues equally
between trading and quoting activity, in order to reward markets that publish the best
accessible quotes.
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• The proposal also includes a number of improvements that were recommended by the
Advisory Committee on Market Information. For example, the proposal would broaden
participation in plan governance by creating advisory committees composed of non-SRO
representatives. Such committees would help assure that interested parties have an
opportunity to be heard on plan business, prior to any decision by the plan operating
committees.
• In addition, the proposal would authorize market centers to distribute their own additional
data, such as limit order books, separate from other markets, as well as establish uniform
standards for the terms of such distribution.
Annexure – 2
The Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (Pub. L. No. 107-204, 116 Stat. 745, also known as the
Public Company Accounting Reform and Investor Protection Act of 2002 and commonly
called SOX or SarbOx; July 30, 2002) is a United States federal law passed in response
to a number of major corporate and accounting scandals involving prominent companies
in the United States. These scandals resulted in a decline of public trust in accounting
and reporting practices. The legislation is wide ranging and establishes new or
enhanced standards for all US public company Boards, Management, and public
accounting firms. The Act contains 11 titles, or sections, ranging from additional
Corporate Board responsibilities to criminal penalties, and requires the Securities and
Exchange Commission (SEC) to implement rulings on requirements to comply with the
new law. Some believe the legislation was necessary and useful, others believe it does
more economic damage than it prevents and yet others observe how essentially modest
the Act is compared to the heavy rhetoric accompanying it.
The first and most important part of the Act establishes a new quasi-public agency, the
Public Company Accounting Oversight Board, which is charged with overseeing,
regulating, inspecting, and disciplining accounting firms in their roles as auditors of
public companies. The Act also covers issues such as auditor independence, corporate
governance and enhanced financial disclosure. It is considered by some as one of the
most significant changes to United States securities laws since the New Deal in the
1930s.
The Act came in the wake of a series of corporate financial scandals, including those
affecting Enron, Tyco International, and WorldCom (now MCI). Named after sponsors
Senator Paul Sarbanes (D–Md.) and Representative Michael G. Oxley (R–Oh.), the Act
was approved by the House by a vote of 423-3 and by the Senate 99-0.
Source: “Sarbanes-Oxley Act”, http://en.wikipedia.org
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Reference:
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