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On NYSE Euronext 3rd Quarter Results
This is a short analysis of the NYSE Euronext 3rd quarter results. It is needles to say the operator reported a decline in their overall earnings, given the conditions on the exchanges it operates. In this short overview it will become obvious that the chronic lack of any trading volume and the complete dominance of trading machines has a severe impact on the overall financial result of the operator.
NYSE Euronext (NYX) today reported net income of $125 million, or $0.48 per diluted share, for the third quarter of 2009, compared to net income of $174 million, or $0.66 per diluted share for the third quarter of 2008. Third quarter 2009 GAAP results include the impact from merger expenses and exit costs, the impact of the disposition of Hugin Group B.V., the sale of our investment in BM&F Bovespa and a fair value adjustment to our investment in BIDS Holdings, L.P. Pro forma non-GAAP diluted earnings per share excluding these items was $0.53 in the third quarter of 2009, compared to $0.72 in the third quarter of 2008.
The big drop is no surprise; given the amount of trading that went on in the same period of last year, a period which was marked by financial turmoil and large daily trading volumes. Since then many retail investors have pulled out of the, NYSE Euronext operated, exchanges due to the losses which they suffered in the period between October 2008 and March 2008, or because the trading cost were proved to be lower on other exchanges. The drop in the earnings could be prescribed to the lower volumes on the exchanges, and solely based on that this report would not be so important.
But what is important to note; is the drop in the market share endured by the exchanges which are operated by the company. This is a statement given by Duncan Niederauer, CEO of NYSE Euronext:
“We continue to see stabilization in our core businesses and significant progress on our new initiatives,” said Duncan L. Niederauer, CEO, NYSE Euronext. "We have successfully maintained market share in our U.S. (NYSE) and European cash markets and have grown market share in U.S. equity options. We have seen a strong increase in new issuances, where we lead the U.S. in both IPOs and secondaries. We significantly enhanced our global derivatives franchise with today’s announced semi-mutualization of our U.S. futures exchange. In addition, we announced a similar semi-mutualization of our NYSE Amex equity options business, launched NYSE Liffe Clearing in Europe and established New York Portfolio Clearing, a joint venture with DTCC. Lastly, our announced acquisition of NYFIX will greatly expand our NYSE Technologies product offering and client base.”
But, per report provided by Bloomberg the opposite appears to be true. Bloomberg provided the analysis of the operator in which it clearly states the firm lost market share in the last year. And the loss is, in no way, minor; actually it is significant. The firms share of the US market fell from 34.8%, in 2008, to 28% in 2009. That is a pretty big drop in the market share considering the prime spot which the firms exchanges hold in the trading world. I don't know if Mr. Niederaures statement, given shortly after the results were published, can be taken seriously after we have just provided the facts which say that the situation for the operator is not, exactly, bright and shiny.
Bloomberg, also, reports the following:
Chief Executive Officer Duncan Niederauer boosted rebates for NYSE’s biggest customers and cut fees at two options exchanges in the past year to stem losses in market share in Europe and the U.S. to newer competitors such as Chi-X Europe Ltd. and Direct Edge Holdings LLC. He also eliminated at least 62 U.S. jobs this year after cutting about 230 in 2008 and said last quarter he may surpass a goal of cutting $175 million in costs this year.
This is an interesting business move by the operator which tells us not only is the company's market share down almost 20% y-o-y, but that it is down despite the boosted rebates which the company offered to its main customers. One asks; which number would denominate the companies market share if the increase in the rebates has not been done. We can only speculate on that. Also, it is interesting to notice that NYSE Euronext main competitors are gaining market share, despite the lower overall volume this year. So it is no surprise the company was, and still is, strongly opposed to any regulation of High Frequency Trading. If the regulation, concerning the HFT, is voted in, the full financial impact on the operator will become visible in their fourth quarter financial results. It will be interesting to see how much did HFT, and HFT related products, contributed to the operators overall financial performance.
Furthermore, when we break the net revenue into revenue categories, the structure of the operators business model becomes surprisingly clear. So let us see which revenue categories form the backbone of NYSE Euronext business model.
- Global derivatives trading accounts for 30%
- European cash trading accounts for 13%
- US cash trading accounts for 9%
- Global market data accounts for 16%
- Global listings accounts account for 16 %
- Software and technology services account for 8%
- Other accounts for 8%
This revenue structure is nothing out of the ordinary, percentage wise, given the size of every particular field from which the operator generates its revenue. What may come as a surprise is the percentage of its revenue which come from the US cash trading accounts. Only 22% of all the net revenue is generated by equities trading, which comes as a surprise given that the public perception of the operator is mostly that of a player in the equities markets.
Also it is interesting that the company is planning to sell a stake, which it holds, in NYSE Liffe Inc., the company's US futures exchange. In a side note, it is also important to notice the operators giant loss of market share in it French exchange CAC. In 2008 the French exchange held 55% of the market share, but now only holds a 46% share of the market.
This is just another example of todays trading environment, which is dominated by financial behemoths, and their machines. It also shows us that with the disappearance of the retail investors from the market, the only thing that can keep it up and running is excess liquidity provided by the FED, which is then funneled into the market via its Wall Street proxies. More fair and rational approach to the market is, both, needed and desired.
These were just some of the more interesting parts in the operators 3rd quarter report. If you want to know more, and read the full report, you can do that here, or if you wish to read a brief summary of the report, you can do it here.
Thank you for reading.
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Cut fees and increased rebates, sounds like a car company.
Well presented report Cheeky.
The problem with the NYSE is that they fail to realize that
the future belongs to a fully electronic de-fragmented direct access exchange....
The exchange has morphed into software which simply labels units with a time stamp and who it belongs to....
Obviously the exchange is becoming more like a communications switch process than should cost very little to click a mouse......maybe 20 cents per hundred units....
Also a computer does not care what the item in trade is....the item is just a price....it could be for a stock...a bond...a commodity....currency.....an option....whatever....
Thus efficiency.....not inefficiency rules the day.....not what a handful of people want....The NYSE is finding this out.....
By the way .....hat tip to BATS.....They are going places because of one item.....you guessed it....."efficiency"....
IMHO, the whole thing is a just a playground for a bunch of dudes so they can surf the net on the bbgs and yell at each other ... the whole thing became outdated in 1997 when the internet went mainstream ...
Ok - Let's assume for a minute you are right...what do you propose as an alternative and why hasn't anyone else figured this out in the last 12 years?
http://batstrading.com/home/