Nasdaq's eSpeed Acquisition Gets Pro and Con Reactions

A decision by Nasdaq OMX to acquire the eSpeed electronic trading platform from BGC Partners for U.S. Treasury bonds and notes is a smart diversification move but credit agencies and investors seem to think otherwise.

Yesterday, Nasdaq OMX saw its stock price drop by more than 10 percent on Tuesday after it announced a deal on Monday to acquire eSpeed, an electronic trading platform for U.S. Treasury bond and notes from BGC Partners. Nasdaq agreed to pay $750 million in cash and up to $484 million in stock over a 15-year period to buy the electronic platform.

The deal prompted Moody’s Investor Services to place Nasdaq OMX on review for possible downgrade, reported am AP news story on Bloomberg BusinessWeek.

The reason for Moody’s action is that last year Nasdaq agreed to pay $350 million to Thomson Reuters for a business that focuses on investor relations, public relations and webcasting services business.

According to the AP News article:

Moody's estimated that the eSpeed acquisition, combined with the Thomson Reuters deal, will result in a $1 billion increase in the company's debt and weaken its financial profile.

While the ratings agency viewed the diversification moves away from the stock exchange business as a positive, it said the recent acquisitions highlighted some of the weaknesses in the exchange operator’s core trading and clearing businesses, where revenue dropped 13 percent last year.

However, Nasdaq’s top executives see the deal differently. “We think it creates a strong position in one of the most liquid and global asset classes,” an exchange spokesman told me. The U.S. Treasury bond market has more than $500 billion traded daily, which is almost three times bigger than the U.S. equities market with $150 billion in daily trading volume. In addition, Nasdaq sees some other big volume drivers ahead, such as the issuance of new Treasuries, fiscal uncertainty, continued migration of fixed income products to electronic platforms. It expects key headwinds to recede, such as the Federal Reserve’s QE program, the US debt ceiling and risk-on investing, which will lead to an increase in volume in U.S. Treasuries.

In the announcement, Robert Greifeld, CEO of Nasdaq OMX, noted the eSpeed platform derives 70 percent of its business from fixed contracts and has a long-standing presence on trading desks around the world. Trading firms subscribe to the eSpeed data feed — and there's an arbitrage between the US Treasuries bonds and the swaps traded on ICAP's platform. Both platforms are in different data centers and there is a colocation business around that.

Yesterday, shares of Nasdsaq OMX fell $3.31, or 10.3 percent, to $28.70, while today, shares were trading at $28.08 as of 11:55am. In the past 52 weeks, the stock traded between $32.89 and $21.03.

Meanwhile, the move to sell off eSpeed sparked a trading rally in BGC Partners’ shares, as the pending transaction clarified its business model. On Tuesday, the shares rose $1.87 or 48.6 percent to $5.72, while approximately 26,391,700 shares changed hands, a 1,596.3 percent increase over its 65-day average volume, reported AP News. Today, BGC Partners’ shares are trading at $5.15. In the past 52-weeks, the stock traded between $7.49 and $3.11.

In its release, BGC Partners conveyed that eSpeed represented under 6 percent of its revenues, and that analysts expected to the company to earn $1.85 billion in 2013. BGC said it would retain all of its other voice, hybrid, and fully electronic trading, market data, and software businesses, including voice, hybrid and electronic brokerage of off-the-run U.S. Treasuries, as well as Treasury bills, Treasury swaps, Treasury repos, Treasury spreads, and Treasury rolls. BGC will also continue to offer voice brokerage for on-the run U.S. Treasuries.