NYSE Chief: Becoming a Competitive Futures Mart

By Brad Zigler

The New York Stock Exchange, says CEO Duncan Niederauer with some cheek, is a 216-year-old infant company. Waiting more than two centuries to go public seems to have paid off handsomely, though. Since demutualizing two years ago, the exchange, properly known as NYSE Euronext now, has transformed itself into a diversified global enterprise through a series of acquisitions that include the London International Financial Futures Exchange and the American Stock Exchange.

And now, the exchange has debuted as a domestic futures bourse after acquiring the precious metals trading business of the Chicago Board of Trade. Electronic trading of gold and silver futures on the NYSE LIFFE platform began September 8, with first-day volume of 31,821 contracts. By week's end, futures open interest had gained a respectable 7% in a commodity group that has been aggressively liquidating since mid-July.

Trading in derivatives, such as futures, is an essential part of the exchange's efforts to diversify its asset base, according to Niederauer. "Derivatives are our single largest business," he said, and now account for more than a fifth of NYSE's revenues.

NYSE Euronext Revenue Sources

"A big chunk of the derivatives business comes from outside the United States," said Niederauer. "The majority of that derivatives number comes from our LIFFE business in the United Kingdom."

With the entry into stateside futures, the derivatives slice is likely to grow even larger. Getting into the business was both serendipitous and carried little downside for NYSE Euronext, according to Niederauer. The Board of Trade's metals franchise was likely to be jettisoned by its corporate parent, the Chicago Mercantile Exchange, in order to get U.S. Justice Department clearance for the acquisition of the New York Mercantile Exchange, the home of large-scale COMEX metals trading.

"We felt that we needed a footprint in the United States," said Niederauer. "There were really only two ways in: one was through acquisition - and there weren't that many properties left to buy, and they were quite expensive - and the other one is to try to grow one organically."

Ambitions, at least to start, are modest. "It's a very small franchise," said Niederauer, "but it gave us a reason to go to the Commodity Futures Trading Commission [the U.S. commodity market regulator], get our license and then establish our own clearing solution. We know we're late, but we know we have very little to lose. It'll be 20,000 or 30,000 contracts a day - but it's a start, it's a foothold, and then we can hopefully develop new products from there."

The new business gets something else NYSE Euronext wants: more exchange-friendly oversight.

The CFTC's modus operandi is principle-based regulation, a fluid, situation-based ethos that contrasts sharply with the rigid and rule-based regimen of the Securities and Exchange Commission, NYSE Euronext's once-exclusive domestic overseer. This looser oversight style has been proposed as model of securities regulation in U.S. Treasury Secretary Henry Paulson's plan to merge the SEC and the CFTC (see "Proposed CFTC-SEC Merger Already Derailed?").

Not surprisingly, Niederauer is a fan.

"People hear ‘principle-based regulation' and it's fairly easy to treat that as a euphemism for little or no regulation," says Niederauer. "But it's not about a race to the bottom," he added. "It's plenty of regulation."

With that, Niederauer is quick to draw the distinction between a modern futures or securities bourse and the opaque world in which over-the-counter instruments like credit default swaps and auction rate securities trade.

Citing the recent lockup in the mortgage-backed securities market, Niederauer said, "The unregulated parts of the market basically went out on strike. You couldn't find a price, you couldn't see a price, you couldn't get a price."

More, not less, regulation is needed in that arena, admits Niederauer.

His marketplace, NYSE Euronext, didn't melt during the crisis. "You could trade," he said, "and the volumes were unprecedented. Transparent markets actually work."

"So my view is, be selective and be targeted. I think principle-based regulation for well-developed, transparent markets works great."

Competitiveness is the impetus for looser regulation, says Niederauer. "Other countries are basically competing against us on the challenges of our regulatory environment. Running exchanges are more and more about technology. So if I'm going to be asked to welcome competition - which we do - then, to me, principles-based regulation allows for a lot more fluidity."

"The rules written in 1933 have no relevance to today's market," added Niederauer, referring to the Depression Era legislation that created the SEC.

"Our company has a 75-year-old rule book; the people with whom we compete don't. So if every time I want to go try to do something new or innovative, we've got to look back at 75-year-old rules that have nothing to do with today's market, it makes it very difficult. I don't need more regulation. I actually need more sensible regulation."