Thursday, October 06, 2005

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One more analogy: Mom & Pop grocers that were ubiquitious during the early part of last century have been replaced by "Supermarkets."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


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