Tuesday, November 29, 2005

Lucchetti's Got Diarhea of the Pen

WSJ reporter, Aaron Lucchetti, has been scribing articles that create questions, among some investors, about the strength of NYX. In August 2005 he wrote a piece in WSJ that raised doubt that the NYSE members would actually vote in favor of the NYX deal -- in its current form (i.e., the structure put forth in the S-4 filing). Re-read The ArcaNews take on this bearshit here.

Now that the facts have prevailed, and time has moved us to within about a week of the NYSE member vote, we can see things as they actually are.

The often written about, Bill Higgens case, is behind us. The only thing that came from that was about $3.5mm in fees for Citi thanks to Mr. Bill. He effectively took $3.5mm of shareholder cash and blew it on a trivial excercise of ego thumping.

Back to Lucchetti.

Today he used a lot of space for a long-winded article ab0ut NYSE market share. He takes a brief look at the history of the exchange, and clearly points out that he's disconnected from reality.

Reality is that ArcaEx is the number one electronic execution venue. Lucchetti blabs about an archaic NYSE structure giving way to traders that are looking for speed. This is something that AX shareholders have long-known, and invested in. Bringing together the top worldwide brand, for bourses, and the top trading factory, will create the 800-lb gorilla in the global marketplace.

Why doesn't Lucchetti look at the significant increases in market share among ETFs (and Barclays move entirely to AX at the expense of market share for AMEX). ETFs traded on Arca are eroding ETF market share among Nasdaq and Amex.

Arca brings ETF leadership, and market share to the table once the NYX deal closes. Arca brings trading in deriviatives such as options to the table. Futures and bonds will trade on the NYX, and Lucchetti doesn't delve into how the new NYX will be an entirely different businesses as a for-profit company.

The NYSE and AX both have been focused on the NYX deal for around the last 12 months. When the biggest deal and transformation in history is about to happen to the NYSE, it's understandable that business will pause a bit. This is a case of taking one step back in order to take 100 steps forward.

Lets look back at Lucchetti's nonsense a year from now. Lets see if he inks an article about the improvements the NYX has made in terms of market share among, not only in listed-stocks, but in OTC equitites, ETFs, bonds, futures, and PC power.

Is Dow Jones this hard-up for business writers? Lucchetti would be better served writing for a tabloid.


Anonymous Brooke Hayes said...

Motley - Been reading your posts for a long time, and have benefitted tremendously from it.

I hang out in the Archipelago message board on Yahoo, but don't generally post.

It's funny to see the pin-heads like nycyclops1 on those boards get so mad!

Please, keep up the good work!

11:56 AM  
Anonymous Anonymous said...

You can call Lucchetti names, and badmouth the articles he writes, but I got news for you, he's correct. The facts don't lie. NYSE market share has been slipping all year and is now below 75%.

Check out the latest projections in the Citi fairness opinion. The market share assumptions for both NYSE and AX were lowered for this year. Miraculously, ie. in order to make the numbers in '06 and '07, the market share assumptions rise, but it's clear that listed volume is fleeing the NYSE.

Like the previous commenter, I have been reading your blog and the Yahoo message boards, but unlike the previous poster, I find your words to be ill informed.

At $55/shr, the market cap of NYX group is $8.7B. The latest pro forma projections in the Citi opinion have NYX earning about $295M in '07, or $1.87/shr. That means AX is trading at 30x '07 pro forma income.

And just keep this in mind, that $295M of net income in '07 is completely phoney. Read the Citi fairness opinion and compare it to the original S-4 sent out in July. You'll notice the following:

- $17M of accounting adjustments to amortize listing fees, essentially adding non-cash revenue going forward.

- $15M/year in revenues from upping the trading license fees from $20K to $40K

- Using a 200bps lower tax rate

- $15M in extra income from reducing the amortization of deal fees

- Assuming that AX OTC market share now hits 31% in '07, when it is currently below 24%.

The list goes on. Do your research. The information is all out there, you've just to do the work.

3:03 PM  
Anonymous Anonymous said...

Bear This in Mind About the NYSE
Exchange stocks have been losing ground of late -- just one of several potential negatives to consider if the Big Board goes public
Judging by the sell-off slamming the stocks of the already public exchanges, investors might want to tread carefully as the New York Stock Exchange's owners prepare for their biggest step in going public -- the Dec. 6 vote on merging with publicly held Archipelago Holdings (AX ). The balloting, expected to lead to a publicly traded NYSE as early as January, has speculators salivating.

Memberships -- or seats -- on the still-private NYSE have climbed from $975,000 in January to $3.5 million in late November. But the optimism at the NYSE may be a bit overdone. Triggered by a couple adverse analyst reports, the slide in the already publicly traded exchange stocks shows how inflated the sector has become.

The Chicago Mercantile Exchange (CME ), which went public at just $35 a share in December, 2002, and soared to nearly $397 by Nov. 25, has fallen nearly 7%, closing at $370 on Nov. 29. The Chicago Board of Trade, which leapt from a $54 offering price on Oct. 18 to $134.50 by Oct. 24, has skidded even more sharply, to $93. After offering its shares for $26 each on Nov. 16 and shooting above $44 the same day, Atlanta's fast-growing energy futures bourse, the IntercontinentalExchange (ICE ), has dipped below $32. Archipelago itself, which went public at $11.50 a share in August, 2004, jumped to $62 by Nov. 22, but has now slipped under $55.

STARK DIFFERENCES. The reality is that not all exchanges are created equal. Unlike the NYSE, for instance, the Chicago futures markets have virtual monopolies on the products they trade. They have proved this by rebuffing challengers such as Eurex, the European giant that so far has failed to horn in on the Board of Trade's Treasury bond trading or, more recently, the Merc's foreign-currency markets. In spite of such assaults, volumes on both Chicago markets have climbed relentlessly -- even while the Chicagoans have raised prices for traders.

With such edges, they're better bets than the equities markets, says analyst Richard Herr of Keefe, Bruyette & Woods. He adds, "It's important to make distinctions."

Even between the Chicagoans, there are stark differences. The Mercantile Exchange, for example, owns its own clearinghouse and provides clearing services for the Chicago Board of Trade under contract. The clearing of trades -- guaranteeing that buyers and sellers of futures contracts will have their orders met -- is a lucrative and central function that gives the Merc a choke hold on the CBOT.

What's more, the Merc lately has been far more innovative than the CBOT, constantly churning out new products for investors to trade. With such advantages, it's not surprising that the Merc sell-off has been small compared to the slide afflicting its crosstown rival.

LOTS OF UNCERTAINTIES. The differences between the futures markets and such equities exchanges as the NYSE and Archipelago are even more important. Forget the idea of a monopoly with the equities exchanges: Investors can buy a stock on the NYSE and then sell it on Nasdaq, Arca, or any of several local stock exchanges (such as the Chicago Stock Exchange).

This means that, despite its world-class brand name, the NYSE's market power is feeble next to the futures bourses. Indeed, the NYSE lately has been losing market share to its many rivals and has now slipped below 74% in its own listed stocks -- maybe its worst performance ever.

The deal with Archipelago will bring back some of that market power -- particularly as the all-electronic Arca Exchange brings the NYSE the ability to handle electronic trading that will match or exceed the power of rival Nasdaq. As the NYSE and Arca blend their operations in the coming year, investors increasingly will be able to bypass the specialists who now slow down trading on the NYSE floor.

But even if Arca boosts the NYSE's share of stock trading, price cuts or other consumer-friendly moves by Nasdaq and other rivals could pare the NYSE's market share still more, warns analyst Richard Repetto of Sandler O'Neill & Partners. "They won't be able to maintain," he argues, predicting that the NYSE and Arca combined could slip, maybe to 60% or so of the trading in NYSE-listed shares in the coming year.

For all of the exchanges, though, lots of uncertainties are further clouding matters. Equities have largely moved sideways in the last year, and no one knows whether the lackluster volumes will continue. While the growth in futures and options trading has been stunning -- driving the Merc stock particularly -- it's not clear whether the breakneck pace of gains will slow now that electronic trading has settled in as the norm at the Chicago Mercantile Exchange.

SHIFTING TIDES. Finally, it's not clear whether such foreign players as Euronext and Eurex could make inroads into the U.S. -- or whether the U.S. markets themselves will grow as they reach overseas. "Things are pretty opaque," warns analyst Herr.

For investors, far too many questions remain. Will the New York and Arca exchanges merge seamlessly? Will they and others look abroad for growth? Will the equities markets move into futures and vice versa? "You're going to see a coming together," former NYSE chairman John S. Reed said on Nov. 29, after appearing with Merc CEO Craig S. Donohue at a panel discussion on the exchanges at the University of Chicago's Graduate School of Business. But how quickly will that happen and what form will it take? No one knows.

As the answers to such questions unfold, investors certainly can't bet -- as some have so far -- that the rising tides will lift all the exchanges equally. If the most recent downturn in the exchange stocks shows nothing else, it makes clear that the shifting tides will take some of the outfits down a lot more sharply than others. And, over time, the differences among the exchanges will likely loom larger, making the battle far more intriguing but perhaps even tougher to call. For those hoping to profit handsomely from a public NYSE, the risks are daunting.

3:11 PM  

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