The ‘Great Rotation’ Can’t Come Fast Enough for NYSE

by Dan Burrows | February 6, 2013 10:34 am

They say you can’t cut your way to growth, but with trading volumes plumbing the depths, the big exchange operators appear to have no choice.

In the latest news that the exchange business continues to struggle[1], two of the biggest names — NYSE Euronext (NYSE:NYX[2]), owner of the iconic New York Stock Exchange, and Germany’s Deutsche Boerse — are moving to slash jobs and reduce overhead amid desultory trading volumes.

Last year marked the lowest point for trading volumes in 14 years, at least on the New York Stock Exchange, and it still shows no signs of letting up, even as U.S. equity markets approach all-time highs.

The 220-year-old NYSE already was on a cost-cutting tear before it struck a deal in December to sell itself[3] to 12-year-old upstart IntercontinentalExchange (NYSE:ICE[4]). But after a 75% drop in fourth-quarter net income amid an 11% decline in revenue, NYSE announced it would ramp up cost-cutting ahead of the merger.

“The lackluster trading environment continues to impact our results,” said Duncan Niederauer, chief executive officer of NYSE, summing up the quarter.

At the same time, Deutsche Boerse said it would reduce expenses by 70 million euros annually amid a 9% decline in full-year net revenues.

Whether you’re an old-line operator like NYSE or Nasdaq OMX (NASDAQ:NDAQ[5]) — or an upstart like ICE — the name of the game is cost cuts and consolidation.

NYSE, if you recall, was all set to be sold to Deutsche Boerse for $9 billion back at the beginning of 2012 before European regulators scuppered the merger. Indeed, ICE and Nasdaq OMX tried to prevent the ultimately failed Deutsche Boerse deal by making an unsuccessful hostile bid of more than $11 billion for NYSE.

The exchange business hasn’t been a good one for a long time. The move to decimalization from fractional price quotes has been killing margins for a decade. More recently, revenue has taken a beating from record-low trading volumes, ultra-low interest rates and a decline in listings thanks to a drop in initial public offerings.

True, near-record levels on U.S. stock market indices and the big flow of funds back into stocks from bonds in January might just point to better days ahead for exchange operators. As NYSE’s Niederauer said:

“While one month doesn’t make a trend, we’re hopeful that this is an indicator of the re-emergence of the retail investor and the resurgence of interest in the U.S. equity markets.”

But with sweeping regulation having put the big banks’ proprietary trading desks, in-house hedge funds and private equity shops essentially out of business, a sustained rebound in volume to pre-crisis glory days is hardly a sure thing — despite retail investors’ resurgent appetite for stocks[6].

Besides, after two massive market crashes in less than 10 years, the next hiccup in equities will probably make retail investors spit up stocks again in a flash.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

  1. the exchange business continues to struggle:
  2. NYX:
  3. struck a deal in December to sell itself:
  4. ICE:
  5. NDAQ:
  6. retail investors’ resurgent appetite for stocks:

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