By Edgar Ortega
June 24 (Bloomberg) -- NYSE Euronext’s control of U.S. stock trading is slipping away.
Two-hundred seventeen years after the New York Stock Exchange was founded under a Wall Street buttonwood tree, its modern-day parent executed a record low 30.2 percent of May’s trades, data compiled by Bloomberg show. That’s down 2.8 points from February for the worst three months since June 2008. The beneficiary wasn’t Nasdaq OMX Group Inc., the Big Board’s main rival for 38 years. It was Direct Edge Holdings LLC and Bats Exchange Inc., which more than doubled their combined share since August to 22.8 percent.
“When you are in a purely electronic marketplace, the fact that you’re the original or the oldest guy standing doesn’t mean anything anymore,” said Michael Rosen, a senior vice president at UNX Inc., a Los Angeles brokerage. “The people doing the trading aren’t buying the story of the Nasdaq or the NYSE. They just want the fastest and best execution they can get at the lowest price.”
NYSE Euronext’s share in the world’s biggest stock market declined even after the $3 billion purchase of the Chicago-based Archipelago electronic exchange in 2006. That highlights the growing influence of alternative trading systems like Bats and Direct Edge, both majority-owned by Wall Street firms.
‘Transformative’ Deal
The notion “that the legacy exchanges can acquire their way to market share dominance is suspect because order flow is portable,” said Jamie Selway, who founded the New York brokerage White Cap Trading LLC in 2003 after stints at Archipelago and Nasdaq. The NYSE’s 2006 acquisition still “stands the test of time” because it “was transformative,” added Selway, now a Bats Exchange board member. “I bet order flow was an afterthought.”
An average of 8.86 billion shares worth $69.5 billion changed hands daily last year in the U.S. stock market, according to Bloomberg data. When the NYSE-Archipelago deal was unveiled in April 2005, there were half as many transactions and the two companies handled 50.7 percent of the total volume.
John Thain, then the NYSE’s chief executive officer, called the acquisition “an essential step to maintain our global competitiveness and leadership” as overseas rivals “expand their reach and capture market share.”
Jesse Derris, Thain’s spokesman at the public relations firm Sunshine Sachs & Associates, said Thain was unavailable to comment.
First Place
The deal transformed the Big Board from a member-owned nonprofit organization into a publicly traded company and the world’s largest stock-exchange operator. Its revenue almost tripled to $4.7 billion last year, from $1.63 billion in 2005, according to the 2008 report.
NYSE Euronext handled $38.05 trillion in stock trades across seven equity markets last year under CEO Duncan Niederauer, a 49-year-old former Goldman Sachs Group Inc. executive hired in 2007, according to the World Federation of Exchanges in Paris. Nasdaq OMX was behind at $37.78 trillion. Their closest rival, London Stock Exchange Group Plc, oversaw $7.77 trillion. The federation’s 51 member markets handled a total $113 trillion in 2008.
In the U.S., NYSE Euronext’s share of trading has shrunk by 35 percent since the merger, falling each of the past seven months, its longest losing streak since at least 2005, Bloomberg data show. Nasdaq’s market share gains from its $1.12 billion acquisition of rivals in 2004 and 2005 have evaporated.
Lagging Stocks
The NYSE and Nasdaq are home to all public U.S. companies, which have a total market value of $10.6 trillion. Their combined grip on trading has waned to 50.8 percent from 74.1 percent in March 2006.
NYSE Euronext and Nasdaq OMX are the worst stocks this year among 18 bourses in the FTSE/Mondo Visione Exchanges Index, even as average daily U.S. trading climbed to a record in March. The index has gained 32 percent this year through yesterday as Nasdaq slumped 18 percent and NYSE Euronext declined 3.3 percent. Australia’s ASX Ltd., up 5.5 percent, was third-worst.
Joseph Mecane, NYSE Euronext’s chief administrative officer for U.S. markets, said the company remains the nation’s dominant marketplace and is fighting to regain some lost business by replacing its 25-year-old SuperDOT trading system. The new one will cut processing time by 90 percent to less than 10 milliseconds, making the NYSE “as fast as all the other channels” offered by rivals, Niederauer said this month.
‘Competitive Space’
“We’re hopeful that it will have a little bit of a boost for our market share,” Mecane said in an interview. “But it continues to be a very competitive space. The brokers will keep any one venue from growing too large.”
The Big Board dominated U.S. stock trading for two centuries until 1999, when Nasdaq started to catch up as prices for technology stocks listed on its exchange soared, data from the World Federation of Exchanges show.
Back then, the Nasdaq-NYSE rivalry was focused on persuading companies to list shares on their own boards and dominating the buying and selling of those stocks. Richard Grasso, the Big Board’s chairman and CEO from 1995 to 2003, used to say he had reserved the ticker symbols M and I for Microsoft Corp. and Intel Corp. to lure them from Nasdaq, where they still reside.
Nasdaq, founded in 1971, lost ground against new electronic markets during the first half of this decade. The share of trading of its listed stocks fell to 51.3 percent in 2004 from 61.6 percent in 2000, when the exchange became a for-profit company, according to regulatory filings.
Down Again
By acquiring the Inet and Brut electronic trading networks, Nasdaq clawed back to 57 percent in 2005, U.S. Securities and Exchange Commission filings show. By April, it was back down to 34.4 percent.
In 2006, the Big Board’s share of its listed stocks dipped under 75 percent for the first time since at least 1976, when the exchange started keeping records.
The New York company commanded 38.9 percent of the trading volume in its listed stocks last month, more than Nasdaq, Direct Edge and Bats combined. Most of the remainder is handled by brokerages that arrange private sales between their own customers. Bloomberg LP, the parent of Bloomberg News, owns a rival electronic stock-trading system, Bloomberg Tradebook LLC.
SEC rules made it easier for marketplaces to compete for trades in 2006. Joe Ratterman, CEO of Bats Exchange, said traders want to foster that rivalry by distributing their business to multiple venues. The Kansas City, Missouri-based company was founded in 2005 and sold a majority stake to a group of 11 securities firms, including Morgan Stanley and JPMorgan Chase & Co.
‘Keeping Diversity’
“The industry won’t let any market center grow to more than 20 percent or 25 percent of market share,” said Ratterman, 43. “The reason has a lot to do with keeping diversity of liquidity pools and resiliency.”
To fend off competition, NYSE Euronext and Nasdaq have cut transaction costs for brokerages by 50 percent and overhauled their trading systems.
They also have expanded into Europe and derivatives, decreasing their reliance on U.S. stock trading to generate revenue. Last year, NYSE Euronext and Nasdaq got 63.2 percent and 84.7 percent of their total revenues from the U.S., down from 100 percent and 95.4 percent in 2006. NYSE Euronext and Depository Trust & Clearing Corp. on June 18 announced plans for a joint venture to clear U.S. fixed-income derivatives.
Niederauer, the 49-year-old NYSE Euronext CEO, told investors this month that the company has fended off competition by retaining the largest slice of trading in its listed stocks.
‘Pretty Satisfied’
“We have stemmed the tide on that,” he said at a June 5 conference organized by Sandler O’Neill & Partners LP, a New York brokerage. “I’m pretty satisfied for the moment that we are bigger than the next three competitors combined.”
Nasdaq CEO Robert Greifeld is trying to offset its market- share losses by letting more brokerages install trading equipment in Nasdaq’s facilities to shave milliseconds off the time it takes to execute buy and sell orders. That strategy generated $99.2 million of its $1.46 billion in net revenue last year.
“They want to put their cabinets in our data centers because they want to give us order flow, so it’s a double win for us,” Greifeld, 51, said in an interview last month. “We will be in the position to attract new market participants and increase liquidity.”
Direct Edge plans to introduce a lower-cost trading system once it gains official exchange status from the SEC. The Jersey City, New Jersey, company started operating in October 2005 and is controlled by Goldman Sachs, Knight Capital Group Inc., the Chicago hedge fund Citadel Investment Group LLC and International Securities Exchange Holdings Inc. in New York.
‘Challenge’ for Upstarts
“These are great organizations with a lot of resources, and none of them like losing business,” Direct Edge CEO Bill O’Brien, 38, said of his more-established rivals in an interview. “That puts the challenge back on us.”
The upstarts’ market-share growth may be limited because their emergence makes buying and selling of stocks more complex for investors used to one-stop shopping.
“More fragmentation is not better,” said Thomas Garcia, who runs the Santa Fe, New Mexico, trading desk at Thornburg Investment Management Inc., which oversees $40 billion in assets. “Give me the liquidity in one spot, and I’ll trade with you.”
To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.
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