Issue of the week: Welcome to Wall Strasse

last updated 8 January 2015

“This one hurts,” said David Weidner in MarketWatch.com. Deutsche Börse, operator of the Frankfurt Stock Exchange, this week agreed to merge with NYSE Euronext, operator of the iconic New York Stock Exchange. And make no mistake, the NYSE is the prey, not the predator. The $10.2 billion deal takes the form of a stock swap that will leave Deutsche Börse shareholders with 60 percent of the combined company. How did this happen? Like “a multitude of U.S. companies,” the NYSE has “miscalculated and lost muscle on the global stage.” First, it got “walloped” by “fast, cheap, and deadly efficient” electronic exchanges that sprang up in recent years. Then it gambled and lost by going public in 2006. Although it did so to amass the capital to buy overseas exchanges, its stock “languished amid the financial crisis,” leaving it vulnerable to a bidder willing to pay shareholders a premium. Now a proud symbol of U.S. might has morphed into “a painful reminder that U.S. institutions have lost their edge in the global marketplace.”

This is about the decline of trading floors, not America, said David Randall in the Associated Press. “The decades-long evolution of stock trading from shouting floor brokers to the cold, quiet hum of computers” has made operating a physical trading venue “a lousy way to make money.” Indeed, the New York exchange “makes more money from selling complex financial contracts” known as derivatives than it does from stock trading. So don’t think that “creating a giant stock exchange” is the impetus for this merger, said Jeremy Grant in the Financial Times. The real lure is the prospect of big profits from futures, options, and other derivatives. They have become a growth area as governments around the world push derivatives out of the shadows and onto exchanges where regulators can track them. Few rivals are likely to spring up to challenge the exchanges for the derivatives business; the information technology that supports electronic trading is prohibitively expensive.

Who would want to launch a stock market today in any case? said Felix Salmon in The New York Times. The number of companies listed on the major exchanges has been declining for years, and those that remain tend to be on the mature side. Indeed, the stock market has ceased “to reflect the vibrancy and heterogeneity of the broader economy.” Dynamic young “stars like Facebook and Twitter” avoid the public markets altogether, preferring to raise money through private sales to “select institutions and well-connected individuals.” That’s not to say the stock market is irrelevant, but it’s no longer the “bedrock” of capitalism. “The real business of the global economy is leaving the stock market—and the vast majority of us—behind.”