Hollywood has given us two major images of Wall Street. The first comes from the 1986 drama Wall Street, with its antihero Gordon Gekko and his dark, intellectual, strategizing about acquiring a company's stock to control its future. A corporate raider clad in the philosophical garb of Sun Tzu, armed with a simple tool – stocks – and confident of his power to wield those stocks to control the existence of everyone around him.
The second is from the comedy Trading Places, where the action hinges on the broadest possible attempt to corner the market on the future price of frozen orange-juice concentrate. The hapless characters there don't have the option of manipulating stocks. They're working with options and futures contracts, esoteric tools that are far more unpredictable than stocks.
Which one do you think has won the day ?
I'm sorry to tell you that the Gordon Gekko vision – the world of stocks as the tools of ultimate financial power, all played out in the open – died Thursday, when the New York Stock Exchange agreed to sell itself to the Intercontinental Exchange.
It used to be that the NYSE's model – providing a market where people could buy stock and sell it – was the center of financial power plays. But the biggest exchange in the United States today is not a stock exchange. It is a commodities exchange: the CME, which is the former Chicago Mercantile Exchange.
Against all odds, it is the Trading Places version of Wall Street – the world of commodities, of wheat and coffee, and of derivatives – that is in the ascendant.
The NYSE is fully aware of its final abdication to the future. "We felt consolidation was inevitable," said the NYSE's CEO, Duncan Niederauer, to CNBC.
In Wall Street jargon, "consolidation" means "mergers". And what Niederauer was conceding was that the NYSE could not have survived on its own.
"It shows how tough the business has gotten," said Sal Arnuk, the co-founder of Themis Trading. "It's symptomatic of how horrible [stock trading] has become, that it's either 'consolidate or die.'"
The NYSE long ago read the obituary of stock markets and recognized that it was losing ground. Currently, it makes less money from fees for trading stocks – which should be its core business – than it does from listing new companies on the exchange. The ICE deal, if it gets regulatory approvals, will cap six years of the NYSE's efforts to save itself. In 2006 it merged with Chicago's Archipelago Exchange to expand its world into the trading of options, which are contracts that allow investors to bet on the future price of a stock or commodity.
The new NYSE started allowing computer trading alongside the "open-outcry" traders on the actual stock exchange floor. It rented out its trading floor – once a deafening hub of financial activity – as an expensive camera studio. It merged with the American Stock Exchange to snap up one of its last surviving US competitors and with Euronext to expand its business globally. Last year, the NYSE attempted to merge with Germany's Deutsche Boerse – again to expand internationally, and into the world of options and derivatives – but the deal failed.
Mergers come with downside, however: the technology doesn't always keep up. Even as the NYSE started moving towards using more computer trading, it had a major disadvantage: trades that crosses the exchange were visible. Increasingly, big investors want their trades to be done invisibly, to move big blocks of stock quietly without waking up others who could beat them on the price.
It doesn't help that the New York Stock Exchange and its primary rival, Nasdaq, have been plagued with big and small technological failures. The "flash crash" of 2010 was a notable low point, when dozens of stocks lost their value for no discernible reason. Companies listing their stock for sale to the public for the first time – in initial public offerings – have seen glitches galore.
"This shows how important young technology has become in mergers," Arnuk said. "The New York Stock Exchange is being taken over by ICE, which is a technologically rich company. You thought the exchanges have been dragged kicking and screaming in to new technologies ? Look how it's accelerating. It will be a bigger boys' game very soon."
It's not just computers that the NYSE was losing ground on. Increasingly, its competition was not other stock exchanges; despite years of strategic smacktalk between the NYSE and Nasdaq, that rivalry is as outdated as the Brooklyn Dodgers versus the New York Yankees.
The real threat – and the one the ICE and the NYSE combined will fight – is the CME, the quiet, brilliant and ruthless giant exchange in Chicago.
The CME has also been steadily acquiring its rivals, from the Chicago Board of Trade to the New York Mercantile Exchange. It allows customers to trade everything from bets on the future price of wheat to currencies to derivatives contracts designed to predict how much snow will fall in any given month. It is fully global, with operations in Asia and ownership of a stock exchange in Brazil. It is even a force on social media, with an active profile on LinkedIn and – incredibly – 750,000 followers on Twitter who tune in to read everything from economic reports to stories about oil futures and the rise of the Indian rupee.
The CME has proven that there is no such thing – or at least, no such successful thing – as a "stock" exchange any more. There is little money to be made as the middleman for stocks, and the CME does not trade stocks. It trades contracts that few mom-and-pop investors ever see, much less understand: options, futures, commodities contracts, various derivatives.
Where the NYSE's business is easy to grasp by anyone who's been on eBay – bid, buy, sell – the CME's business is limited to the sophisticated investor.
And increasingly, that is why the NYSE's makeover is not just – as it is sure to be billed – the death of Wall Street. It is also the beginning of the death of financial involvement for Main Street.
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