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WIKI ANALYSIS
NYSE Euronext is an American corporation that owns and manages several stock exchanges, including the NYSE, Euronext (Europe), and NYSE Arca (formerly Archipelago). The company's revenue is generated through the number of listings (companies on the exchange) and the number of trades executed.Its April 2007 merger with Euronext moved it a step close to creating a worldwide securities and derivatives exchange, resonating with the trend of global stock exchanges consolidation.
The NYSE is the largest exchange in the world; it has nearly twice the transaction volume as NASDAQ, it's main competitor, and approximately four times the combined market capitalization of its listed companies. However, its competitors have begun to take over its trading market share as they develop new trading technologies. NYX has begun to implement new technology platforms, such as a virtual trading platform and taking its derivatives trading in-house. In addition, NYX is affected by a number of macro-economic trends because they have a direct effect on the number of listings and trades executed, such as the overall financial health of the U.S. economy. Rather than waiting for organic growth, NYX has been aggressively investing in and acquiring other stock exchanges around the world.
Company Overview
NYSE Euronext's business revolves around the trading of all types of securities and services associated with it. Unlike its all-electronic competitors, the NYSE remains the last major American exchange to use a hybrid exchange (both trading floor and electronic trading) rather than an all-electronic exchange.The main components of its revenue are[1]:
- The Activity Assessment is a typical fee that exchanges pay to the SEC to recuperate the costs of having to monitor the securities industry. The cost of these fees are passed down to the companies which are listed on NYSE Euronext's exchanges and do not have an effect on NYX's net income.
- Cash Trading is the fee charged for executing trades and accounts for more than half of NYX's revenue. It's effect on total revenue depends on the number shares and trades executed, which are subject to the volatility of the market.
- Derivatives Trading revenues are based on a per-contract basis. Revenue is dependent on the fees charged per contract and the number of trades executed.
- Listing: Companies pay an initial fee in order to become listed in one of the company's exchanges. After that, companies pay a yearly listing renewal fee.
- Market Data: The company provides data on the securities listed its markets. Subscribers include professional data analysts, as well as other individuals. It also receives revenue for providing data to financial news networks.
- Software and Technology Services revenue is generated from customer fees to gain access to its SFTI Network (connectivity to an equities marketplace) ,software license and maintenance fees, as well as strategic consulting services.
- Regulatory fees are charges to all member organizations that are part of its exchanges.
| Annual Financial Data, in millions $USD | 2006[3] | 2007[3] | 2008[4] | 2009[4] | |
|---|---|---|---|---|---|
| Gross Revenues | $2,376 | $4,158 | $4,474 | $4,299 | |
| Operating Income | $234 | $909 | $1,143 | $803 | |
| Net Income | $205 | $643 | $763 | $533 | |
Trends and Forces
Aggressive global exchange investment and acquisition strategy
NYX has actively pursued acquisitions and mergers since 2006 since it invested in and partnered with the National Stock Exchange of India and the Tokyo Stock Exchange. In 2007, it completed its landmark merger with Euronext, which added $2.9 trillion in securities and is the first company to attempt a 21-hour trading day, as well as $1.6 billion in revenue. Furthermore, it allows the company to have access to European trading markets and to international firms that would rather become listed in Europe, rather than the U.S.
The American stock exchange market is highly competitive and NYSE Euronext is pursuing an aggressive strategy of mergers, acquisitions, and strategic partnerships in order to continue to increase its domestic and international presence. In 2008 alone, it purchased shares in AEMS (cash and derivatives trading technology), AMEX Membership Corporation (now NYSE Amex), Wombat Financial Software, Qatar Exchange, as well as a joint venture with Depository Trust and Clearing Corporation (DTCC) to start New York Portfolio Clearing by 2Q2010.[5]
In March of 2010, CBOE Holdings Inc, the Chicago Board Options Exchange began planning a $300 million public offering that could allow the biggest U.S. options exchange to expand or be acquired. CBOE Holdings Inc. is not a direct competitor of NYSE Euronext since NYX does not trade in the options market; however, NYX's COO Larry Liebowitz addressed the possibility of an acquisition of CBOE Holdings by NYX after the company goes public.[6]
New technologies and its affect on market share
In the past, NYX has been reluctant to adopt new technologies and has lost market share to its competitors because of its hesitancy. As of July 2009, it reported a 28.3% market share of all U.S. trading July, which was down from 34% last July.[7] NYX lost valuable cash trading market share due to its reluctance to adopt a controversial flash ordering technology that competitors like NASDAQ and Bats Global Markets have adopted. Flash ordering technology allows a client to see orders for a fraction of a second before they are disseminated to rival platforms and allows the client another opportunity to complete the order.[8] However, to NYX's benefit, both NASDAQ and Bats have announced that they will discontinue the use of flash ordering on September 1 after a SEC announcement that it would look to ban the practice because of beliefs that it can be used as an unfair advantage.[8]
In addition, NYX has plans to introduce new technology offerings, such as a virtual trading platform and its own derivatives trading platform.[9] Derivatives trading generates 20% of NYX's revenue, and by bringing it in-house, the London-based derivatives platform is expected to generate approximately $100 million in additional revenue.[10]
Stricter regulatory environments
The Sarbanes-Oxley Act of 2002 imposes a strict set of regulations on companies listed on American exchanges. These regulations include independent auditing, frequent reporting, and changes to corporate governance[11]. The funding required to follow all regulations may not be available to all international companies. This, combined with the perception of rampant litigation in the United States deters many foreign firms from filing with an American exchange.
Senate Derivatives Bill Could Drastically Increase Profits for Exchange Operators
On April 29th, 2010, debate on financial reform entered into the Senate with the new provision of the Senate Agriculture committee's derivatives bill that would bar swaps dealers from accessing the Federal Reserve's discount lending window or any other government guarantees. Swaps are derivative trades used by banks, financial firms and commercial companies to offset risks or hedge for or against certain outcomes. The biggest U.S. banks such as Morgan Stanley, Goldman Sachs Group (GS), and J P Morgan Chase (JPM) are the biggest swaps dealers, controlling 96% of the swaps market.[12]
Many derivatives contracts are traded over-the-counter directly between parties; however, the bill will require all derivatives to be approved by the Commodity Futures Trading Commission and traded on open exchanges to bring greater transparency to the process. This regulation will drive business to open exchange operators such as Euronext, CME Group and Intercontinental Exchange. [13]
U.S. Economic Cycles
NYSE-Euronext is very susceptible to the downturns and upswings of the U.S. and global economies. Although it is concentrated in the U.S. and the U.K., it's global investments across countries like Qatar, Japan, and India, have made it globally diversified. However, the 2007 Credit Crunch and 2008 Financial Crisis led to global economic downturns. A weak economy means that initial public offerings, or new listings, are less likely to occur. Listings generated approximately 10% of NYX's revenue. Additionally, a volatile economic environment leads to more trading activity, witnessed by the 11.9% year-to-date increase in U.S. cash trading.[14]
Competition
NYSE Euronext faces fierce competition from both within and outside the United States. While its merger with Euronext has helped offset some of the decrease in the rate of increase of new listings, it must now compete with other local stock exchanges on an international level.
Locally, NYSE Euronext faces increased competition from Nasdaq Stock Market (NDAQ) as it purchases privately-held exchanges such as the Boston Stock Exchange and the Philadelphia Stock Exchange (both privately held) in order to diversify its product portfolio.
References
- ↑ NYX Quarterly Report, 1Q2009, 03/31/2009
- ↑ NYX 2009 10K
- ↑ 3.0 3.1 NYSE Euronext 2007 4th Annual Report, "Selected Financial Data," 2/9/10
- ↑ 4.0 4.1 NYSE Euronext 2009 4th Quarter News Release, 12/31/09
- ↑ NYX 2Q2009, 08/07/2009
- ↑ Reuters, "NYSE COO says $5 billion too much for CBOE" 3/29/10
- ↑ Wall Street Journal, "NYSE Euronext Seen Gaining Market Share As Rivals Drop Flash," Jacob Bunge, 08/07/2009
- ↑ 8.0 8.1 Bloomberg, "Nasdaq Profit Falls 31% as Competition Cuts Business," Nandini Sukumar and Whitney Kisling, 08/06/2009
- ↑ SmartBrief, "Analysis: NYSE Euronext aims to stay competitive with technology," 08/04/2009
- ↑ Bloomberg, "NYSE Euronext Posts a Loss," Jacob Bunge, 07/31/2009
- ↑ Sarbanes-Oxley Act of 2002 Section 201
- ↑ Forbes 'Swaps Split Could Cost Banks $85 Billion In Capital'
- ↑ Street Authority 'Financial Reform Creates Opportunity for These Stocks'
- ↑ Stockhouse, "NYSE Euronext Announces Trading Volumes for July 2009," 08/07/2009
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