IntercontinentalExchange's planned acquisition of NYSE Euronext, announced Thursday, will expand opportunities for trading between energy and equity products as well as give control of successful agricultural products to the Atlanta-based exchange, financial industry observers say.
"The move would allow traders access to exchange traded funds on NYSE," said Dennis Gartman, editor and publisher of the Gartman Letter. "There would be spread trading and arbitrage opportunities that would also mean lesser margins and more liquidity,"
ICE plans to acquire NYSE Euronext in a stock-and-cash transaction worth around $8.2 billion and with that comes a bigger name that carries more weight (See story, 1346 GMT).
"The New York Stock Exchange carries weight around the world, not everyone has heard of ICE," Gartman said. "So the intention with this acquisition is to take ICE as global as possible."
During an appearance on CNBC Thursday morning, ICE Chairman and CEO Jeffrey Sprecher mentioned the branding.
"Honestly, very few have probably heard of our company," Sprecher said. "But the New York Stock Exchange is a global brand," Sprecher said.
While ICE has not been known for launching any new major contracts in recent years, it has had had tremendous growth, said Ole Hansen, vice president and head of commodity strategy at Danish investment bank Saxo Bank. "But the contracts they do have have gone from strength-to-strength -- just look at Brent and what that has done."
ICE will also bring in strengths from its electronic trading platform, whereas NYSE Euronext comes from a background of floor trading.
"It wasn't until relatively late they joined the electronic trading scene -- NYSE can only benefit from the ICE experiences," Hansen said.
While the transaction doesn't necessarily change the competitive landscape of the exchange world -- it just changes the ownership -- the move gives ICE access to heavily traded agricultural products, including Liffe wheat futures, according to Richard Repetto, principal at Sandler O'Neill & Partners. It also allows ICE to better compete with CME Group's US-based agricultural exchange business.
Total wheat futures volume on ICE was just 772 lots as of Wednesday with open interest around the same level, according to ICE data. The NYSE's Liffe European milling wheat total volume was 60,000 lots, with nearly 300,000 in open interest as of Wednesday.
Rival CME Group's winter wheat contract had total volume of 84,430 contracts on Wednesday with open interest of about 444,000 lots.
The CME Group still leads the way in corn, with total futures volume of 224,209 lots on Wednesday, and open interest at 1.16 million contracts. Total open interest in the ICE corn contract stood at just 1,483 lots Wednesday, with Liffe corn open interest at 26,377 lots.
Of the top 30 derivatives exchanges in the world, CME Group ranks first, while NYSE Euronext is fifth and ICE comes in at number 12, according to data from the Futures Industry Association.
But while total exchange volume between January and October 2012 has fallen from the same period in 2011 by 15.3% on CME to 2.465 billion contracts, ICE has seen growth of 14.2% over the same time period to 327 million contracts.
NYSE Euronext volume during that time has fallen by 16.3% to 1.63 billion contracts.
LESS LIKELY TO RAISE ANTI-TRUST CONCERNS
The acquisition also holds less antitrust issues for ICE as it moves ahead with the deal alone as opposed to its previous attempt to buy NYSE Euronext in 2011, analysts said.
At that time, ICE teamed up with NASDAQ OMX, offering $11 billion for NYSE Euronext in a hostile joint bid that was rejected twice. NYSE Euronext later tried to merge with Deutsche Borse, but that deal was scrapped by regulators.
"This time [ICE] muscled them," Gartman said. "If anyone thinks this is a merger of equals, they are wrong. This is a takeover."
One critique of the deal, said Repetto, is ICE's move into a "slower growth" cash equity business.
NYSE Euronext operates exchanges in Europe and the US for trading equities, futures, options, fixed-income and exchange-traded products and with around 8,000 listed issues, NYSE Euronext's equities markets -- the New York Stock Exchange, NYSE Euronext, NYSE MKT, NYSE Alternext and NYSE Arca -- represent one-third of the world's equities trading, the most liquidity of any global exchange group.
In announcing the deal, ICE also said it would explore an initial public offering of Euronext as a Continental European-based entity if market conditions and European policy makers support such an arrangement.
Stephen Schork, president of Schork Report, said the acquisition will likely mean greater transparency for ICE, bringing it under more scrutiny from the Commodity Futures Trading Commission.
And while it could bring greater liquidity to the marketplace, ICE's acquisition runs the risk of creating a stronger correlation between equity prices and commodity prices, Schork said.
"One of the harder issues is for commodity users to relate to the disconnect between underling supply and demand cost drivers and price action [on the exchange]," Schork said. "It is hard to comprehend for people hedging a winter's worth of heating oil and see that in mid-June, heating oil prices are higher than the previous winter just because equities rose."
This acquisition could bring greater-than-normal volume and growth risks of cross margins that was unintended, Schork said.
ICE added it expects the transaction to close in the second half of next year, subject to regulatory approvals in Europe and the US and approval by shareholders of both companies, after which NYSE Euronext shareholders will own around 36% of ICE shares.
