At Reuters, Felix Salmon has, predictably, the best take on the just-announced $8.2 deal for IntercontinentalExchange Inc. (ICE) to buy the New York Stock Exchange. Yes, that New York Stock Exchange, itself combined these days with another exchange called Euronext.
Felix's basic point — and this may require a bit of gray-cell exertion to get — is that there are basically two distinct worlds in which trading happens: the old school world of stocks, with which we're at least passingly familiar; and a new school world of trades in products that are based on some other product or asset — derivatives.
The derivatives market is vast. But the vast majority of people probably hadn't even heard of derivatives until the financial crisis, when "collateralized debt obligation" and "credit default swap" lurched into the popular vocabulary.
As Felix notes, ICE only wants the NYSE for Euronext's derivative-trading platform, called Liffe. It could care less about the "big board" or the photogenic trading floor, populated with traders who always look like they're furiously trading stocks (see slide show, above), but where very little meaningful trading really happens anymore. The actual NYSE is more a stage set for CNBC, for movie promotions, and photo op ringings of that famous opening bell.
Why has this happened? Easy answer: profits. Here's Felix:
It’s actually a good thing that stock trading has become a low-margin, low-value business: that’s what’s meant to happen when you have lots of competition. Think of it as one of the few areas of the financial-services sector where capitalism works as advertised. Elsewhere, we still have enormous salaries and enormous margins, which is one reason that ICE and CME between them are going to have a market capitalization of well over $30 billion by the time this merger is done.
Exchange mergers, then aren’t actually boring at all: they’re an indication that the financial-services industry is desperately trying to protect the rents it can collect by means of consolidation. There are lots of stock exchanges, and none of them make much money. By contrast, there are relatively few derivatives exchanges, they tend not to compete directly with each other, they tend not to compete on price, and they’re wildly profitable.
Read into that what you will. It sounds to me like derivatives exchanges have carved out a special place for themselves in an esoteric, "Matrix"-like parallel universe of the financial markets. They're a product of capitalism, but they aren't really capitalistic — they're meta-capitalistic, or if you're inclined toward a Marxist view, post-capitalistic. If they were truly of capitalism, they wouldn't be worth anywhere near as much as what Felix pegs as the combined value of the NYSE-ICE union, something on the order of $30 billion.
If you were around for some of the academic debates of the 1970s and '80s, you'll recognize this transition: economists and historians have hotly debated the idea that something would replace/displace capitalism since the post-war boom began to retreat. What's fascinating about the NYCE-ICE development is that it has a borderline science-fiction feel to it — the important exchange platforms are now technologically driven, and mere humans can't keep up with what the machines are doing.
It also has a weird sense of placelessness: an exchange based in, of all places, Atlanta, is buying a symbol of American capitalism in New York City so that it can leverage a trading platform that's based in London and that trades global speculative products based on other products that are also speculative traded, but with far lower returns.
As Felix's blog post title says, the NYSE doesn't matter. It's still cool to look at in pictures, on T.V., and even in person. But the real action in money has moved elsewhere, to far less public and well-exposed arenas.