The Trading Floor Isn't Dead Yet
When IntercontinentalExchange Group Inc. bought the New York Stock Exchange last year for $11 billion, it promised to keep the floor operating as a condition of the deal. The pledge made sense -- from a public-relations perspective. But it wouldn't be long before ICE realized its mistake and closed the floor, the conventional wisdom said at the time.
Goldman Sachs's news this morning -- that it plans to sell its NYSE floor specialist business for a song -- could even hasten the ending. Not so fast. I think it's premature to announce the death of the NYSE floor, which still holds value, even if it's dwindling.
True, the floor is a vestigial operation, and an expensive one at that. It's also true that the bell-ringing at the opening and closing of each trading day is mostly ceremonial. Trading, after all, continues electronically around the clock. What's more, about 85 percent of the trades in the NYSE's listed companies are executed elsewhere.
As a branding exercise, however, the floor is priceless. It showcases the NYSE as the citadel of American capitalism. The television broadcasters who reflexively show openings and closings, and whose correspondents breathlessly analyze the market from the floor, are handing the NYSE many millions of dollars of free advertising.
But what's in it for IMC Financial Markets, the Dutch company looking to buy Goldman Sachs's specialist business? One thing is the attractive price. IMC could be getting for $30 million what Goldman paid $5.4 billion for in 2000, when it acquired Spear, Leeds & Kellogg, once one of the NYSE's premier middleman companies.
Another thing is the insider status that comes with owning a specialist business. IMC's executives will have a front-row seat in any negotiations over the future shape of the NYSE.
But the biggest factor in IMC's decision may be that it is a high-frequency trading company. As Michael Lewis explains in his controversial book, "Flash Boys," the speed traders are part of an ecosystem with the stock exchange at the center. The exchange charges lower fees to the big banks and brokers to give them an incentive to send their orders to the NYSE. The exchange also sells the speed traders tailor-made data feeds that contain valuable information about supply and demand in individual stocks, and thus where prices are headed. And the exchange leases space adjacent to its computers to the high-frequency outfits, who use the proximity to shave fractions of milliseconds off their reaction time.
All of this reveals the symbiosis between high-frequency traders and the NYSE. IMC's relationship would just be closer and more interdependent than the rest. Purchasing Goldman's specialist unit (they're now officially called designated market makers) would allow IMC to milk whatever is left in the NYSE's business of trading its listed stocks. IMC would also get a leg up on other high-speed traders.
There's one more possible explanation. Regulators could decide that high-frequency trading is unfair or too risky, and impose speed bumps that make the business model unprofitable. If that happens, the floor would win back some of its market share, and IMC, as the third-biggest specialist, would benefit. That, my friends, is called a hedge.
All in all, IMC is getting a pretty good deal for $30 million.
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