Refreshing report in Crains Chicago

Chicago Crains Business reporter, Aaron Elstein, has drafted a great article about the NYX deal picking up steam (click here to read it). Rather than write an absurd article about Mr. Putnam's 100,000 share sale, and pontificate about potential uses for his earnings, Elstein elaborates on the reality that the risk of the vote not coming out in favor of NYX is quite low. He explains that while the crusty old critics (read: Higgens and Langone) may've attracted a handful of friends to join their crusade, the Big Board and Archipelago have continued their march -- and their march has gained tremendous support!

To be sure, silly conjecture about potential pitfalls to this deal have been ubiquitous in the WSJ, the Financial Times, and Barrons (to name a few) essentially since the NYX deal was announced on 4/20/2005. It's truly refreshing to read an article that cites facts, names sources, and presents the story as it really is -- an incredible growth story that has and will reward shareholders.

Litigious exchange members not unique to NYSE

The demutualization of stock exchanges is not unique to the NYSE. The London Stock Exchange ("LSE") was demutualized in 2000. This demutualization process was similiar to that of the NYSE in that members of the bourse had a vote regarding whether it should be demutualized. Read about that here.

Once again, facts prevail, and it is clear that the arguments regarding ownership percentage allocation were about as useful as a professional wrestling referree.

The Chicago Board of Trade ran into litigious members when it announced its plans to demutualize and become a public company. In this case, the minority member lawsuit ended with a verdict in favor of this minority group members. The suit was brought about because a small group of CBOT members opposed the allocation of ownership percentages once the transformation commenced.

Once again, facts prevail, and it is clear that the arguments regarding ownership percentage allocation were about as useful as a professional wrestling referree (read: not at all useful). Now the CBOT is a public company that has seen its stock value rise from ~$55/share to ~$115/share in the course of about 9 trading days.

Every stakeholder in the CBOT (short sellers aren't stakeholders, they're stakesellers) has to be pleased with management's decision to demutualize and become a public company. It is now clear that the split of ownership is completely irrelevant as the market has set CBOT's value -- not an S4, not members, and not CBOT's management. As always, market forces prevail -- and they will for the NYX deal as well. If you're interested follow the link to read CBOT's S4 filing.

So, the LSE and the CBOT are two examples of exchanges that endured litigious members and ultimately had incredibly successful demutualization outcomes.

NYX vs. Nasdaq in Europe

The London Stock Exchange is an ideal takeover target/merger partner for the NYSE. And given competition with Nasdaq, it makes sense to mention that in 2000, Nasdaq's management considered merging with the LSE. For whatever reason Nasdaq's plans fell through as they attempted to open exchanges in Europe.

In 2003, the Nasdaq tucked its tail between its legs and closed down its ambitious European exchange (the Easdaq located in Belgium). Read about that here.

And in 2002, the Nasdaq folded its Japanese operations, as it admittadly failed tremendously there.

Nasdaq's blunders in Europe effectively take it out of the European-market competition. They didn't make any friends with rival bourses while they were over there, and the fact that UK-based Barclays moved its ETFs over to ArcaEx hints towards amiability of British companies with the NYX.

In Europe, the NYSE has a strong chance to successfully integrate with an exchange like the LSE.

Putnam realizes some income

Today's article in the NY Post suggests that Gerry Putnam cashed in some chips in order to "to possibly buy the equivalent of a seat on the Big Board, according to filings." This brings up a couple of points:

1) Mr. Putnam realized an incredible profit on the ~100,000 shares he cashed in. He still owns 1.2 million shares of AX that would be an incredible tax burden if he sold. Also, these shares still stand to gain considerable value as the NYX deal closes and 2006 brings about the first changes of NMS.

2) Nowhere is it stated that Mr. Putnam is definitively purchasing an NYSE seat. We all know what a stringent process it is in order to gain approval for an NYSE seat -- by the time Mr. Putnam is approved, he'll be president of a company that doesn't have any seats for sale. If he were to purchase a seat -- well, that's one more vote in favor of the deal and (depending on who he buys it from), potentially one less "no" vote.

And while we tread water until the vote, here are a couple of interesting prose about the world's leading stock exchange:

An article from BusinessWeek from August 4, 1997 dubbed, "The Booming Big Board." This is worth a few chuckles: Click here.

A brief blog-post by a law professor from May 3, 2005 -- discusses the notion that indeed there could be one, unified bourse in the US: Click here

Indeed, it appears as though Wall Street is waking to the notion that buying AX is buying NYX before the glitz hits the fan.

Rest assured, the vote'll happen, the SEC'll bless the deal, and the media will be all over this story. Once that happens, $50/share will seem like a bargain!

NYX Critics!

Making NYSE with disgruntled members

Recently I posted a survey on the AX Yahoo Finance message board. The aim of this brief questionarre was to try to understand where the nay-sayers (read: those opposing the NYX under its proposed terms) are coming from.

In particular, this survey was directed at "memberunvaunted," a contributing member of the AX message board community. He claims that the NYSE should try to find or make a better deal, and that Mr. Putnam would take a lessor offer if push came to shove.

Today he wrote, "Your survey is difficult to respond to as I believe it is based on a false assumption. Seats have not risen in value because of AX but rather because of the fact that the NYSE is now committed to offering stock in the public markets."

Why then, did a NYSE seat sell for $2.5 million in 1999 when the NYSE was believed to be going public, and this time, with the AX deal was announced, seats sell for ~20% more than they did when they were committed to offering stock in the public markets?

The answer is obvious: It's because of the growth engine that AX represents.

As for surveys based on a false assumption, the one circulating that the WSJ wrote about is based on the assumption that the terms of the NYX deal are not fair. Now there's a screwed up premise!

Quick Technical Analysis Note

Interesting to note AX's RSI of late. It's in the 30-35 range, which is considered a bullish range. Here's a quick and simple explanation of RSI.

You can view AX's RSI here. It's in the bottom section of the chart.

Patience is a virtue!

The Market of Tomorrow

It's interesting to consider what a fully-networked global equity market structure could look like.

To be sure, Sarbanes-Oxley ("SOX") has created a virtual obstacle course for companies interested in listing their shares in a US-based bourse. As they say, when life gives you Sarbanes-Oxley, make Sarbanes-Oxley juice!

Here's what I mean.

Once the NYX deal closes, and the world markets digest what this means for their future, more M&A is destined to take place. Ultimately, the NYX should be a leader in this consolidation and emerge as a multi-national organization. The New York Life Insurance Company has demonstrated that just because you have "New York" in your name, it doesn't mean that you can't have an overseas arm, as well. The New York Stock Exchange Group should not be contained to the US, and exploring international options can help jump-start growth.

If NYSE were public today, would it be considered a growth story? Probably not. How could it be? They get to be a growth story thanks to ArcaEx. The canoe is about to get an engine, and if NYX shareholders are the riders, buckle-up. . .here we grow! Think Langone or Higgins have any ideas for generating the type of growth that NYSE seatholders benefit from due to the AX deal? Doubtful. Ok, enough time spent talking about the crabby infidels. Back to the market of tomorrow.

There are numerous advantages that having an overseas arm can produce for NYX shareholders. Perhaps chief among them is that Sarbanes-Oxley doesn't apply overseas. When a multi-national co-lists on an exhange in the US and one in Europe, the rules of the land where the bourse is located apply.

Theoretically, a US-based company can list their shares on an international exchange and bypass the costly requirements that SOX creates. Where SOX is a barrier to entry for many US-based companies, offering an alternative on an exchange in another nation could be appealing.

Though I am not certain of the letter/spirit of the law in these matters, it is clear that growing overseas will provide a competitive advantage.

Reuters reports today about a study commissioned by the NYSE about co-listed companies and their valuations. The article states, "The findings coincide with a further push by the NYSE to attract foreign listings to the Exchange, with Chief Executive John Thain traveling to India and China in the week beginning October 17 to meet managers of prospective listed companies, regulatory officials and government leaders."

So the opportunity is two-fold. One: get companies located overseas to list on NYX. Two: get companies located in the US to list overseas. The opportunities are boundless, and once the NYX deal closes, it will be a lot of fun to watch as the global equity market structure changes.

NYX is the best positioned company and will be considered the Rolls Royce of bourses throughout the world.

Looking beyond earnings

Earnings are irrelevant at this point. Management has concentrated on the NYX deal and PCX deal this year.

In baseball, towards the end of the season, most teams are mathematically eliminated from achieving post-season status. Nonetheless, the teams that have been eliminated play out the rest of their schedule.

They still keep score. They still play by all the rules, but the outcomes of the games are essentially meaningless.

AX has already won the division. They're simply going through SEC-mandated motions of reporting. The content of their report is really pretty meaningless.

So, earnings this quarter are a big yawn at best. But, just think, at this time next quarter, the NYX deal will be closing, the vote will've commenced and much of the doubt that is currently priced into AX's stock price will be removed. So, this should be the last boring quarter wind-down.

Earnings this quarter are not nearly as interesting as pro-forma numbers for the NYX. This is where management is concentrating their efforts now. Mr. Putnam and Mr. Thain have already begun working together, and their focus is on closing the deal and expanding their revenue as a single entitity. They're quite busy in Washington (AX opened an office there several months ago during the NMS proceedings). They're busy talking with bourses in other countries. In short, they're busy developing strategy for the bourse of this millenium.
Think about the evolution of bookstores. 20 years ago, there were tens of thousands of bookstores throughout the world. Some specialized in used books, others specialized in particular topics or types of books/periodicals. Then Borders and Barnes-n-Noble were born. Most of the smaller bookstores went out of business as they couldn't compete with the economies of scale that the aforementioned stores have. And then, technology gave birth to Amazon. To be sure, Amazon and Arca have some similiarities. Perhaps chief among them are that technology enabled them to aggressively and quickly capture market and mind share. The big tend to get bigger, and the small get acquired or go away on their own. Suffice it to say, the NYSE is about as big as it gets in exchange-land. Aside from the London Stock Exchange, NYSE is easily the leader in stock exchanges throughout the world.

One more analogy: Mom & Pop grocers that were ubiquitious during the early part of last century have been replaced by "Supermarkets." Starting to see a pattern?

The bourse landscape is not much different than the competitive landscape of the aforementioned examples. Today, the speciality exchanges include ones that concentrate on commodities, some that concentrate on options, some focus on bonds, etc. But

This shift is akin to the shift that is at the very early stages in the world's capital markets. Ultimately, the world doesn't need multiple bourses. As the capital markets become globalized and digital, as settlement changes from T+3 to T+1 or even 0, as efficiencies and economies of scale take hold, NYX is the best positioned company to be the leader in trading.

Here's an interesting article from Bloomberg News regarding how others in the industry are sharing the views expressed here at ArcaNews.

Reading between the headlines

Even though there hasn't been any real news regarding NYX to speak of lately, today's WSJ article, "Building Portfolios with ETFs," underscores the evolution of the equity markets. It's this evolution that fuels AX. ArcaEx is a massive marketplace in which ETFs are enormously popular.

ArcaEx nearly doubled the number of ETF shares they traded August 2004/August 2005. During July 2005 (exactly 3 months after the NYX deal was announced) Barclays moved 21 of their ETFs from AMEX to ArcaEx.

The WSJ article says:

"More banks and brokerage firms also have added ETFs to their investment lineups, according to James Parsons, a managing director of iShares at Barclays Global Investors, a unit of Barclays PLC and the largest provider of ETFs. These institutions are creating what they call wrap programs, in which advisers manage assets for a fee, either working with a client to pick investments or using an investment model created by the institution.

As an investor, it's typically beneficial to play the market like Gretzy played hockey. That is, if you're looking at where the proverbial puck is headed it's clear that retail investors are moving from traditional mutual funds to ETFs. Wirehouses and banks are now requiring their advisors to obtain Series 66 (or 63 + 65 alternatively) to be able to charge a fee for investment advice.

Wrap accounts are becoming popular and ETFs work incredibly well in these programs. This is where the retail investing puck is headed. Not sure of what the market opportunity is - cheggout the numbers from today's WSJ ETF piece:

"ETF assets stand at $251.5 billion, having increased $100 billion over the past year and a half. While growing strong, ETFs remain small compared with traditional funds, which have $8.5 trillion in assets.""

Numbers this big are hard to ignore!

And, speaking of numbers. There's more good news for NYX reported in today's WSJ. In an article, "Volume reaches monthly record," it's reported that options trading volume reached a monthly record in September, and rose 55% from September 2004.

Guess who's getting into the options market game? AX is already there, and this volume data is good news for ArcaEx. But what's exciting is that the NYSE does not currently do ANY options trades. Once the deal closes and NYSE and AX become NYX, NYSE will take its first step into a growing deriviatives market.

NYX will have endless capacity, and only have marginal incremental costs for expanding their revenue streams by being the marketplace for trading things other than just equities.