The Deal: Exchanges Seek Partners for New Trading

NEW YORK (The Deal) -- The decision by NYSE Euronext (NYX) to take a stake in ACE Group (ACE), announced Monday, Sept. 9. illustrates how stiff competition is pushing exchanges to innovate and diversify their offerings.

By taking a minority stake in ACE's private placement platform, the NYSE is tapping a market worth $1 trillion annually that provides an alternative source of liquidity from the traditional equities market. This market is set to grow in significance as major banks, faced with tough new capital and regulatory requirements, are likely to either re-price lending or tighten their credit criteria.

The transaction comes as exchanges face growing competition from the proliferation of dark pools and new entrants. Last month BATS Global Markets and Direct Edge Holdings agreed to merge. That deal, the companies claimed, would put them ahead of Nasdaq OMX ( NDAQ) as the second-largest U.S. equity trading venue and also put them in a position to challenge the lead of NYSE Euronext as an equity trading venue.

Then, there is the biggest exchange deal this year, the $8.2 billion acquisition of NYSE Euronext by Atlanta's IntercontinentalExchange ( ICE), or ICE, which is expected to create one of the largest derivatives exchanges by contracts traded.

Recent trading outages at the Nasdaq have also called the credibility of its platform into question, potentially creating more opportunity for new players. Last month, the exchange halted trading for more than three hours, saying one of its servers was having trouble processing orders. Of course, technological hiccups happen in other trading platforms as well -- last year BATS was about to have an initial public offering when a glitch in its own platform called it to shelve its debut.

Despite clear incentives for M&A among exchanges in a globalized world -- and one where revenue opportunities outside cash and equities trading is increasing -- dealmakers say sensitivity around national sovereignty and regulatory approval remain a hurdle to potential exchange mergers. Take, for example, the Singapore Exchange Ltd.'s failed bid for the Australian Securities Exchange in 2011. And, while the IntercontinentalExchange's bid for NYSE Euronext got the nod from regulators this year, a joint bid from Nasdaq and ICE in 2011 was withdrawn after opposition from U.S. antitrust regulators.

As such, expansion into new markets via partnerships remains an attractive avenue for growth, as the latest one in the sector demonstrates. The partnership will see NYSE aim to grow ACE's technology to scale and accelerate its use among global financial institutions. ACE's platform enables investment banks and other agents to post and manage securities sales, and investors to search for offerings. Essentially, it allows broker-dealers to interact with thousands of investors on a transaction in the same manner they would a far smaller number under the traditional manual process.

Founded in 2010, ACE is run by former bankers from Bank of America ( BAC), Citigroup ( C), Credit Suisse ( CS), Donaldson Lufkin & Jenrette and JPMorgan Chase ( JPM).

The head of global listings at NYSE, Scott Cutler, said the exchange aimed to lift efficiency in the institutional private market. "Our goal is to make the private placement process more transparent, efficient and auditable for issuers, investors and placement agents," he said in a statement. The NYSE will also be hoping it makes its business a more formidable competitor to new entrants.

Financial terms of the NYSE-ACE transaction were not disclosed and it is not known whether the NYSE plans to lift its stake in the future. A spokeswoman for NYSE declined to comment further on the deal.

-- Written by Jane Searle in New York

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