NYSE Euronext's Niederauer Updates Strategy at SIFMA

At yesterday's SIFMA conference, Duncan Niederauer, President and Co Chief Operating Officer NYSE Euronext, began his talk with the idea that exchanges are technology companies that rely on the business side and IT working in synch. He even invited attendees to leave a business card on the way out, noting that he's "looking to hire technology talent." Niederauer who joined NYSE Euronext only eight weeks ago from Goldman Sachs, where he was a managing director and co-head of the equity division's execution services franchise, offered an update on where the exchange conglomerate stands today and where it's headed.He said the publicly traded exchange company is on course to having a "global multi-product footprint," calling that unprecedented since most exchanges are either regional, equity or derivatives specific.

"There is really no animal like NYSE Euronext," said Niederauer - though he noted the proposed mergers between Deutsche Borse and ISE (International Securities Exchange) and Nasdaq and OMX are two more examples of exchanges following this strategy.

He reminded the SIFMA audience that one of the driving forces behind the rapid consolidation of global exchanges is technology. For example, 90 percent of the synergies promised by NYSE Euronext come from technology, he said. While noting that NYSE Euronext already has an alliance with Tokyo Stock Exchange and owns a five percent stake in the National Stock Exchange of India, he hinted at future acquisitions or partnerships in Asia, ranging from China to other parts of the region. "I think consolidation will largely reside in the U.S. and Europe, there's more to do there and I think Asia is something that gets rolled into the equation later," he said.

With the press focusing on the NYSE's shift to electronic trading -and the decline of the floor broker population- Niederauer emphasized the diversification of its revenue sources. In fact, U.S. cash trading business generates 10 percent of NYSE Euronext revenues whereas European cash trading brings in 16 percent, derivatives trading produces 22 percent, European cash trading brings in 16 percent and market data generates 15 percent.

Experiencing rapid volume growth on the NYSE Arca Options Model, which is up 49 percent from Q1 2006 to Q1 2007, NYSE Euronext is writing letters to the SEC to expand the pilot on penny pricing. "We are very much unlike the CBOE and the ISE. We're in full attack mode on this," Niederauer told attendees, noting that the NYSE Arca Options has a different pricing model and it's a different market model."

"While the NYSE cash business on the floor is an important part of our revenues, the transactions that take place on the floor of the NYSE are a small part of NYSE Euronext revenues," said the Co-COO. Before the Hybrid market was deployed, 20 percent of the NYSE's volume was traded electronically during the pre-Hybrid days, but since the completion of the Hybrid rollout in February, now 82 percent goes through auto-ex.

While "everyone (in the media) wants to write the human interest story about the floor going away," given the role of technology, the floor is going to get smaller. "But I guarantee we will have a trading floor," Niederauer told the SIFMA audience. Niederauer said he'd met with the agents on the floor, who historically could only trade NYSE-listed products, and now they're able to trade Nasdaq stocks, options and European stocks and futures from their booths on the floor.

Though NYSE is operating as a fast market, Niederauer said he didn't want it to become totally automated. "If that number is 100 percent then you've changed the exchange into an automated facility, with no opportunity for price improvement," he cautioned. "We want to be fast when the market wants us to be fast but I've got constituents on the buy and sell-side saying we want to be able to price a block when we need to and we want to have an auction," he said.

On the other hand, now that NYSE has brought its latency down to 100 milliseconds from 30 seconds, Niederauer recognizes that it has to strike a balance. "People will wait a few seconds for price improvement, they won't wait 20 or 30 seconds," he said.

Because people rely on the central exchange, Niederauer told the SIFMA crowd, "It has got to have almost limitless capacity, millisecond latency and had to be resilient," NYSE has over 60 percent market share of the 85 percent in listed stocks that trades on an exchange - 15 percent trades via Nasdaq and 5 percent trades on away markets (ATSs, ECNs). "People are counting on us," Niederauer said, noting that if a competitor that has .05 percent of the volume tips over, it matters less.

Niederauer highlighted several items on NYSE Euronext's agenda: On the Euronext side, with MiFID on the horizon, which he compared to Reg ATS in the U.S., "It's making it easier to create an ECN-like enterprise to compete with the traditional exchanges. We can freely trade stocks not traded on Euronext with the rules are relaxed," he said. Look for NYSE Arca, which in the past focused on outbound routing to other market centers, to play a role in trading stocks not traded on Euronext.

Second, NYSE Euronext is focusing on client connectivity. Following its acquisition in December of TransactTools headed by Sam Johnson - a former VP of Goldman Sachs Group colleague- his group is working hard to build a common gateway technology to access all of the NYSE markets including bonds, options and the Euronext products. "We've got some old system which is the gateway when you enter the NYSE," said Niederauer. This is going to be important with overseas clients, he said.

Third, in August, NYSE Euronext plans to launch MatchPoint, a portfolio-level matching capability. Technology consolidation is also on the docket. With the NYSE, Arca and Euronext infrastructure, three platforms had to go to one platform over the next six to nine months to produce the synergies that were promised. "I think you'll see us endeavoring to get to a universal system. That is the magic of these exchange consolidations, " said Niederauer. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio