No Short-Term Impact for Individual Investors From NYSE Merger

Includes: CME, NYX
by: AAII

Wall Street has been abuzz with the proposed merger between the NYSE Euronext (NYSE:NYX) and Deutsche Boerse. The deal would create a new global exchange.

It's big news for the investment industry. It has also sparked patriotic talk on both sides of the Atlantic about the naming of the combined company. It will certainly bring a close look by regulators. Not to mention the hubbub about what will happen to the infamous New York Stock Exchange trading floor.

For individual investors, it's an interesting event, but not an actionable one. Trades executed by individual investors for buying or selling NYSE-listed stocks are currently routed to computers, not humans. Should the merger be completed, your trades will still be routed to computers.

Over the longer term, it is possible that individual investors could see more and cheaper access to European markets. But even if that were to happen, there is still the question of whether you should trade European companies that are not listed in the United States. I'm not talking about large, multinational companies, but rather those whose business primarily centers on Europe. For instance, what is the equivalent of Kohl's (NYSE:KSS) in Germany? (I'm not ashamed to admit that I have no idea.)

Keep in mind, however, that this merger is less about stocks and more about derivatives. The merger will provide greater access to the European derivatives markets. This is why the CME Group (NASDAQ:CME) is being watched for a potential counter-offer. As I write this, the Chicago-based company has been mum on the subject. I will not speculate on what the CME Group will or will not do.

Derivatives are an area of growth for the exchanges. Plus, regulators believe that having interest rate swaps and other such vehicles traded on exchanges will result in more transparency and, they hope, fewer financial debacles. The Dodd-Frank financial reform bill, signed into law last year, calls for derivatives to be traded on public markets. There is a lot of pushback, however, and House Republicans are trying to prevent many provisions of the new law from being funded.

For individual investors, derivatives mostly fall into the "just because you can trade them, doesn't mean you should" category. They are complex investments that carry counterparty risk--the possibility that the party on the other side of the trade will fail to fulfill their obligation. Derivatives are best used to hedge, not to invest.

Each merger is its own animal, and it will be a while before we know whether the NYSE Euronext-Deutsche Boerse merger will be completed. In addition, any large change in the financial industry has the potential for unintended consequences. On the other hand, the economy and corporations are becoming increasingly global, so it's not surprising to see the exchanges try to expand across oceans.


If you want to invest overseas, a mutual fund or exchange-traded fund (ETF) will get you instant exposure to a variety of companies. Vanguard operates the biggest European funds with its European Stock Index mutual fund (MUTF:VEURX) and its European ETF (NYSEARCA:VGK).

The alternative is to pick individual securities. Many European companies list American depositary shares (ADSs), also referred to as American depositary receipts (ADRs), on U.S. exchanges. (An ADR is the physical certificate, while ADS refers to the actual share.)

The advantages of focusing on ADRs instead of trying to trade on a foreign exchange include lower commissions (they are the same as what you would pay for U.S. stock) and the ability to screen for companies with specific characteristics.


The U.S. financial markets will be closed on Monday, February 21, in honor of President's Day.

Approximately 60 members of the S&P 500 will report earnings. Included in this group are Dow components Hewlett-Packard (NYSE:HPQ), The Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT), all of which will report on Tuesday. Several retailers are on the week's calendar including Lowe's (NYSE:LOW) on Wednesday and Target (NYSE:TGT) on Thursday.

The February Conference Board consumer confidence survey and the December Case-Shiller home price index will be the week's first economic data. Both will be published on Tuesday. Wednesday features January existing home sales. January durable goods orders and January new home sales data will be published on Thursday. Friday features the first revision to fourth-quarter GDP and the final February University of Michigan consumer confidence survey.

Four Federal Reserve officials are scheduled to speak publicly next week: Minneapolis Federal Reserve President Narayana Kocherlakota on Tuesday, Philadelphia Federal Reserve Bank President Charles Plosser and Kansas City Federal Reserve Bank President Thomas Hoenig on Wednesday, and St. Louis Federal Reserve Bank President James Bullard on Thursday.