Majestic Research

Financial Times

Euronext integration no bar to success

By John Authers and Anuj Gangahar in New York
Published: May 23, 2006

If the NYSE Group’s bid for Euronext is successful, one key question remains: can they make it pay?

This would be the first trans-Atlantic stock exchange, and would involve two partners that are both in the middle of radical changes. Euronext is an all-electronic market, while the NYSE has three separate platforms – the electronic platforms of Archipelago and the Pacific Stock Exchange, which it acquired earlier this year, as well as the traditional floor-based trading at its central exchange in Manhattan.

The NYSE is already involved in the highly difficult task of moving to a new “hybrid trading” model, in which stock orders would be offered electronically before then going to one of the floor-based specialists. Adding the integration of Euronext could tax its management team even more.

“Given that Euronext is a fully electronic exchange, it would be interesting to see what kind of impact this potential merger could have on the hybrid plans of the NYSE,” said Sang Lee, managing partner at the Aite Group, a US consultancy.

If the NYSE is successful, it would in effect remove itself from the running to take over the LSE, leaving Nasdaq as the only suitor. Nasdaq’s shares fell 7 per cent as investors digested the fact that the LSE appeared to have only one bidder.

Joe Gawronski, chief operating officer of Rosenblatt Securities, which is a member of the NYSE, said: “I think all member firms would naturally worry that the NYSE has too much on its plate now with the integration of Arca and upcoming Reg NMS [a new set of regulations that will require US exchanges to speed up their trading systems and make them more transparent]. The upside, however, is that unlike a deal with the Deutsche Borse, this deal gives management at both exchanges much more control and autonomy.”

The NYSE’s deal with Archipelago was completed just three months ago.

Doug Atkin of Majestic Research in New York, said that the two exchanges could be run side by side for a while before there was any need to embark on integration, even though this would slow down the arrival of any synergies. “These guys have the luxury of not having to do anything on day one,” he said. “They can carry on running them side by side until they are ready. It’s all about taking a strategic piece off the table."

He added that if the NYSE chose to abandon its hybrid model in favour of going fully electronic – a move which many analysts are predicting – then Euronext’s current electronic platform would probably be capable of handling the full trading volume of the combined exchanges.

Mr Gawronski added that he did not think Mr Thian would “rush to integrate the Euronext platform with the integration of Arca still a work in progress”.

The bid’s backers believe that if the deal is cleared by shareholders, the technology integration issues would be fairly straightforward. The overall synergies highlighted by John Thain – which he put at $375m - will be primarily at the NYSE. Euronext already outsources its technology to an outside provider, whereas the NYSE’s technology is provided in-house, allowing for savings from moving to a joint platform.