A Stock Exchange Needs More Than A Big Tree

On May 17, 1792, 24 stock brokers met under a buttonwood tree on Wall Street. Lower Manhattan has been a center of financial activity ever since, and the swells of suited stockbrokers on those streets at lunchtime have come to seem inevitable.

Soon, however, the people in charge of the Big Board may be at a new address: Neue Börsenstraße 1, 60487 Frankfurt am Main, Germany.

Germany’s Deutsche Boerse Group has agreed to acquire NYSE Euronext, the parent company of the New York Stock Exchange. The deal has already attracted lawsuits from NYSE Euronext shareholders, and will have to clear a number of regulatory hurdles. But if it goes through, the new entity will be the world’s largest owner of equities and derivatives markets.

The new company would have headquarters in both Frankfurt and New York. The bell would still ring on Wall Street at the start and close of the trading day. The statue of “Integrity Protecting the Works of Man” (or rather, a copy, since the original Integrity proved too weighty for the building to support) would continue to look on from her perch. But the real power would be elsewhere.

To spare American feelings, Deutsche Boerse has insisted on presenting the transaction as a merger of equals. The company’s chief executive officer, Reto Francioni, even chided the media for not following his lead in using the word “merger” rather than “acquisition.” “You know I love you guys,” he told one reporter, “but you keep saying it’s an acquisition.”

Despite Franconi’s remonstrance, the deal is clearly lopsided. Deutsche Boerse shareholders would control 60 percent of the new company. While NYSE Euronext CEO Duncan Niederauer would head the operation’s management, 10 of the 17 board seats would go to Deutsche Boerse.

Like Franconi, those on the American side have tried to hide the deal’s unevenness. Sen. Charles Schumer, D-N.Y., has directed his attention, not to questions of management or board seats, but to the name of the new entity. He wants to make sure the New York Stock Exchange, with its supreme advantage of having his state’s name in its title, gets top billing. “NYSE is one of the preeminent brands in the financial industry, and there is no reason it shouldn’t come first in the new exchange’s name,” he said. Though it might seem that a private company’s name ought to be none of the senator’s business, maybe a lifetime of pandering for votes has actually taught Schumer something about marketing.

It has not evidently taught him much about economics. Like so many others, Schumer seems to assume that New York holds some Heaven-sent right to be the perpetual financial capital of the world.

Successful stock exchanges need to be good at what they do. The most important thing they do is raise capital for companies. By that measure, the New York Stock Exchange has fallen behind the competition. In the first 11 months of 2010, the Hong Kong exchange took a strong lead in the global capital-raising race, according to Ernst & Young. The Hong Kong exchange helped 74 companies raise more than $61 billion, nearly a quarter of the global total. China’s Shenzhen Stock Exchange was second, with $40 billion raised. The NYSE raised $31 billion, only 12 percent of the global total, coming in third. Shanghai placed next, with $16 billion raised, to give China (including autonomous Hong Kong) three of the top four spots.

Asian exchanges did particularly well last year because of the lingering recession in the United States and the currency crisis in Europe. But last year’s results were not simply an anomaly based on short-term conditions. American exchanges’ market share has been declining for most of the past decade.

To some extent, this decline is inevitable. This country, after all, comprises less than 5 percent of the world’s population. However, the decreasing importance of American exchanges is more than a matter of demographics and economic development. Companies can choose where they want to make their primary stock listings, and recently they have increasingly chosen to do so elsewhere. Companies from developing nations, in particular, often seek to make their initial public offerings abroad, and Hong Kong has taken the lead in attracting these companies. “Over the past decade, HKEx [the Hong Kong exchange] has evolved as a leading stock exchange for cross-border IPOs,” said Ringo Choi, the Regional Managing Partner for China South at Ernst & Young.

As Hong Kong has built itself up as a convenient place to raise capital, misguided and overreaching regulations in the U.S. are driving companies away. The Sarbanes-Oxley Act, also known as the “Public Company Accounting Reform and Investor Protection Act,” has been particularly damaging. Enacted in 2002 in response to a string of high profile corporate scandals, including the one at Enron, the law greatly complicated the regulatory requirements for public companies. The Dodd-Frank financial overhaul bill that passed last year has made the situation worse by increasing regulatory uncertainty while bureaucrats work through its implications. Such uncertainty is anathema to companies looking to carry out complex transactions.

Politicians’ and pundits’ gratuitous demonization of “Wall Street” and the people who work there do nothing to advance the NYSE’s reputation as a good place to do business. Schumer, who now worries so much about preserving the exchange’s identity as a “preeminent brand,” could not muster the gumption to stand up for his state’s signature industry when it needed his defense the most.

The proposed acquisition of the NYSE is part of a larger trend toward financial market consolidation. Singapore Exchange Ltd. made a bid in October for the company that runs the Australian stock market, ASX Ltd. The London Stock Exchange Group Plc will soon purchase Canada’s TMX Group Inc. There is speculation that New York’s other major exchange, the Nasdaq, may be targeted for a takeover in the near future.

This wave of consolidation may reshape the financial map. If the United States wants to remain a global leader in trading, it will have to earn that position on its current, rather than its historical, strengths.

Wall Street became a financial center because it had a good shade tree, but it remained one because it provided companies with a good place to raise capital and investors with the opportunity to trade at fair prices. If we allow conditions here to become hostile, stockbrokers can find other trees. And they may be oceans away.

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