Market Consolidation, Missteps, Better Opportunities Factored in NYSE

Published February 21, 2011

The merger of the company that owns the New York Stock Exchange with a German firm symbolizes the continuing globalization of finance, some bad decisions by NYSE management, and growing fragmentation of stock trading, say experts contacted by Finance, Insurance & Real Estate Policy News.

It does not symbolize a national decline of the United States as some have suggested. “Although America is declining” along with Germany and Europe, “in a global economy, it is not surprising to see trans-border transactions and consolidations,” said Olivier Garret, chief executive officer at the independent financial research firm Casey Research. “This is one more step in global consolidation of markets consistent with the recent announcement of the London Stock Exchange/TSX merger and the earlier HK/Sydney stock exchanges consolidation.”

That’s Garret’s analysis of the NYSE Euronext and Deutsche Borse of Germany merger, which was announced Feb. 15. Deutsche Borse will own 60 percent of the company. The combined entity will create the world’s largest stock exchange, with net revenue of $4.5 billion. It will have dual headquarters at 11 Wall Street in Manhattan and in Frankfurt, Germany.

‘Race to Establish Leadership’
“Today the world is much flatter, and emerging exchanges are in a race to establish leadership, hence the consolidation,” Garret said. “The NYSE failed to adapt, and it first lost to another younger American icon, the NASDAQ. The costs and restrictions imposed by the Sarbanes-Oxley and Dodd-Frank Acts, plus the threat of further, deeper, ineffective financial regulations, have certainly not helped NYSE retain its leadership position, but I think an irreversible trend was already in motion.”

In a column for, University of Maryland Economics Professor Peter Morici argued the merger “could have profound negative consequences. First, is the obvious prestige impact. NYSE is the symbol of American capitalism, and essentially, it will be foreign-owned. This will further confirm in the minds of world political and financial leaders that gaping U.S. budget and trade deficits, and all the foreign borrowing and high unemployment that results, are significant attributes of an economic super power in decline.”

Garret said “excessive debt, revolving doors between big government and big business—big banks—are stifling markets and accelerating America’s decline.” But he said he sees the NYSE merger more as “a sign that opportunities have no borders and that the United States should take note.”

Need for Free-Market Environment
He added, “If we do not create an environment that favors free markets and enterprises, our global competitors will attract capital and thrive at our expense. What made America successful is nothing less than the fact that it fostered entrepreneurship and success. Socialism, high taxes, and overregulation precipitated the decline of Europe. Through most of the 20th century the United States offered one of the best environments to start and grow businesses. Unfortunately, while many countries around the world have moved toward freer markets, better infrastructure, and lower regulations, the United States has forgotten the roots of its success and adopted the Western European model.”

Nicole Gelinas says Americans should be “bothered” about the merger for several reasons. She is the author of After the Fall: Saving Capitalism from Wall Street and Washington (2009, Encounter Books), a senior fellow at the Manhattan Institute, and a member of the New York Society of Securities Analysts.

NYSE ‘Increasingly Irrelevant’
“In general, yes, U.S. investors should be bothered, not particularly by this transaction, but by the fact that the NYSE has become increasingly irrelevant when it comes to stock trading, a big reason why it has sought a merger partner,” Gelinas said. “Individual financial firms have created their own stock-trading platforms. Fragmentation of the stock-trading market increases opacity and harms investors’ chances of getting the best price.”

She added, “The biggest risk, as I see it, is that Deutsche Borse is not buying the NYSE for its U.S. operations but for its European derivatives operations, which are massive. Should Deutsche Borse consolidate these operations in Europe and also try to grow in London, U.S. derivatives operations could suffer, hurting both New York and Chicago.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate News.