The Shrinking Value of a Stock Exchange
It’s been a rough week for the folks over at NASDAQ and the NYSE. First, on Monday, NASDAQ had 84 stocks flash crash due to a NASDAQ malfunction. Not only did this cause bad press for them, but now the traders who lost money want NASDAQ to cover their losses. We would expect NASDAQ to pay up and cover the losses since the exchange business is a cut-throat, extremely competitive business and exchanges don’t want to risk losing any high volume clients especially when they are trying to take each other over.Then later in the week, the NYSE rejected NASDAQ hostile bid again. Yesterday, the NYSE took the issue to their shareholders to explain why opting for the lower Deutsche Boerse offer is actually good for them in the long run. We wish we could have been at that annual meeting. Niederauer was probably up there preaching about how great a fit NYSE was with Deutsche Boerse. As a matter of fact he probably sounded alot like Mr. Cromwell, the CEO of Teldar Paper from the movie Wall Street. Remember when Cromwell said this:
“I strongly recommend you to see through Mr. Gekko’s shameless intention here to strip this company and severely penalize the stockholders. I strongly recommend you to reject his tender by voting for management’s restructuring of the stock.”
Apparently, the big NYSE shareholders wanted no part of this value approach. They are no dopes and they know the stock exchange model is a failure and they want their money now. Bill Miller of Legg Mason said “It is in the shareholders interest that the board work to maximize value for owners.” In other words, I want the most money I can get right now.
If you haven’t seen it yet, check out Andy Kessler’s op-ed in the WSJ today titled “Make Way for the Virtual Exchange“ with the sub-title “Technology has rendered the stock exchange as we know it obsolete. Trades take place in milliseconds on servers in the great data cloud in the sky.” Mr. Kessler destroys the myth that there is any value to a stock exchange these days:
“Stock exchanges today are remnants of a regulatory regime that fought hard to keep human markets fair while the owners of the exchanges got rich. Stock exchanges make a killing – easy, risk-free profits. They charge listing fees for the privilege of having shares trade on the NYSE -though the assumption of quality for NYSE-listed stocks that have included GM, Fannie Mae and Freddie Mac, Lehman, AIG and Enron is tragically dated. Then there’s market data fees, a charge for your own and other’s trade data sold back to you. Add to that technology fees for the right to hook up to the exchange. It’s an amazing racket and makes up for trading itself not making much money anymore.” http://online.wsj.com/article/SB10001424052748704613504576268960852992164.html?mod=googlenews_wsj
Well said, Mr. Kessler. We also have a few things to say about those market data fees and who actually owns the data, but let’s leave that for another day.
Finally, Bloomberg quotes Duncan Niederauer as saying at the meeting yesterday: “Let’s not be penny-wise and pound-foolish…We would hate to miss out on the accelerating opportunity because we just got a touch too greedy on the ratio.””
Nice try, Niederauer, but the only people greedy here seem to be the exchange executives themselves. Enjoy your golden parachutes.