Nasdaq-NYSE union has power to dazzle
By ANDREW WILLIS
Wednesday, December 24, 2003 - Page B7
Can you copyright a business strategy? 'Cause the Toronto Stock Exchange could make a bundle selling a road map on exchange integration to colleagues at the Nasdaq Stock Market and the New York Stock Exchange.
The two dominant U.S. exchanges are in early stage merger talks, a conversation rooted in Nasdaq's declining market share and the NYSE's well-publicized governance scandal. Having dealt with headstrong executives at both exchanges over the years, I personally doubt that these two crazy kids can get together. There's a culture of cockiness at Nasdaq, and an arrogance at the NYSE, that will be hard to bridge.
But I would also have put even longer odds on the arrogant old boys at the Toronto Stock Exchange ever finding common ground with the upstart cowboys running the Vancouver and Alberta stock exchanges, and the proud nationalists at the Montreal Exchange. In fact, as recently as two years ago, the safe bet would be this gang couldn't agree on what wine to have with dinner.
But everything changed for the Canadian capital markets in recent years, with sanity and sound business sense overcoming regional rivalries.
With then chairwoman, now chief executive officer Barbara Stymiest at the Toronto Stock Exchange serving as catalyst, Canada's exchanges got their act together. First, trading moved out of individual hands, and into the more efficient black boxes of computer systems. Then the exchanges split the trading pie, focusing their resources on specific markets. Montreal took derivatives, the western exchanges got venture companies, and the TSX claimed the senior stocks.
In March, 2001, the TSX brought most of the market under one roof by buying the venture exchange. To keep the one central exchange on its toes, regulators opened up the Canadian market to competition from alternative trading systems. On the governance front, the TSX did the right thing last year when it stopped trying to regulate itself and the companies it listed, and spun out its enforcement arm ahead of a well-received initial public offering.
Here in Canada, we've realized that exchanges are utilities, not much different from pipelines or electrical grids. They've come to the same conclusion in Australia, and most of Europe.
Consumers -- in this case, investors and companies that need to raise money -- are best served by a big, efficient open market. Technology, basic economics, a vigilant regulator and a bit of competition ensure that pushing more business through the trading engine -- in the form of buying and selling --means costs come down and liquidity goes up.
This country seldom celebrates getting things right. The near-national exchange that is the TSX is worth saluting. The fact that the local side is steadily winning market share back from the NYSE, and listing a record number of new companies, speaks to customer approval of the strategy.
(The success of the TSX is not lost on leaders in other arenas. Ms. Stymiest has heard enticements to ditch the exchange for federal politics. She's one of a number of executives across the country that Prime Minister Paul Martin's team approached about running in the next election. While her credentials -- articulate female-accountant-turned-CEO -- make her a shoe-in for the next Liberal cabinet, Ms. Stymiest has rebuffed all overtures. Family considerations, and stock options, make leaving the TSX unattractive at the moment.)
Could the NYSE and Nasdaq make themselves better by getting together? They'd be crazy not to try.
The venerable NYSE may be a world leader, but its customers are far from content. Big U.S. pension funds are in open revolt over the perceived mishandling of their orders by the NYSE's floor specialists who wield far too much power at the exchange. Richard Grasso's scandalous pay package points to an outdated old boys' network at the top, a system that is also flawed in having a market watchdog under the same roof as the companies it regulates.
As for Nasdaq, its international ventures have failed, its dependence on tech stocks has been found wanting and its new trading engine has underwhelmed. A merger with the NYSE would be as much a rescue as it is an alliance.
In incoming CEO John Thain, the NYSE has an open-minded new leader, well versed in the power of technology harnessed to stock trading and the promise and pitfalls of mergers. Mr. Thain helped make former employer Goldman Sachs a leading player in both NYSE floor trading and the electronic systems that compete with traditional exchanges. While a merger of the leading American exchanges would be devilishly difficult, the stars are aligned.
The dance between the U.S. exchanges will be carefully watched at the TSX, for a deal would change the competitive landscape. While the TSX has accomplished a great deal in the past few years, it can do more.
The Canadian exchange still needs to establish a derivatives market, and any expansion of the NYSE's powers should spur the TSX to greater co-operation with the Montreal Exchange, or an outright purchase. The local side also needs to roll out long-promised U.S.-dollar-denominated trading in Canadian stocks, and a better market for trading stocks at their closing prices. Ms. Stymiest and her team got a step ahead of their American rivals, but the NYSE and Nasdaq now look likely to catch up.
awillis@globeandmail.ca |
