Aug 07, 2006 URL:

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1 The success of the proposed merger between NYSE Group and Euronext hinges on consolidating equity and derivatives trading platforms. But uncertainty over the definition of platform makes evaluating the deal difficult. Thu, 27 Dec :11: Aug 07, 2006 URL: The prospect of NYSE Group merging with Euronext to create the world's first transatlantic exchange opens the gateway to trading multiple asset classes across national borders and regulatory frameworks on a single, global cash and derivatives trading platform. But before the partners can achieve their grand business goals, they must tackle an unprecedented global integration project. Executives have said they intend to consolidate and integrate six trading platforms down to two and 10 data centers down to four, while reducing four networks to one. When the merger was announced, John Thain, CEO of NYSE Group, and Jean-Francois Theodore, CEO of Euronext, said publicly that over the next three years the companies would migrate their three equity trading systems (NYSE Group's Arca and Hybrid platforms and Euronext's NSC) and three derivatives trading systems (Arca's PCX Plus and OX - the new options trading platform built by Archipelago - as well as Liffe Connect) onto a single global cash and derivatives platform. Their plans call for "outsourcing the technology" to Atos Euronext Market Solutions (AEMS), a joint venture between Pan-European cash and derivatives exchange Euronext and French IT services firm Atos Origin. Atos currently runs and maintains Euronext's NSC cash trading platform and Liffe Connect derivatives trading platform. At press time, it was unclear exactly which technology responsibilities - such as the integration, systems operation, maintenance, etc. - would be outsourced to Atos. Given the complexity of linking multiple trading venues subject to different trading rules, foreign currencies and regulatory regimes, any efforts to simplify connectivity and access to buyers and sellers is viewed favorably by traders. "It could be very beneficial for the U.S. trader in that most of your investors have recognized the benefits of international diversification," says Peter Driscoll, VP and senior trader at The Northern Trust Co. in Chicago. "There are definitely advantages to that and making it a single platform that is accessible from one desktop," he continues.

2 "It certainly seems to wet my appetite. The [fewer] systems that I have to use, the easier my life is," Driscoll adds. "Based on the idea that it's going to be one platform to be able to execute in Europe or New York,... that should make it easier for everybody, increase volumes and decrease spreads." The deal not only would simplify trading for the industry, it is expected to save the exchanges money as well. By merging the platforms, data centers and communications networks, exchange execs have said they expect to save approximately $250 million - not including the additional $120 million in technology savings expected from the NYSE- Arca merger. If the integration plan goes smoothly, the merger certainly would simplify international trading for U.S. traders. However, a technology project of this magnitude with an accelerated three-year time line has industry experts worried. "We think three years is very ambitious to make these huge changes... when you're also doing the Reg NMS stuff and the Archipelago stuff and they're 3,000 miles apart," says Peter Redshaw, a U.K.- based research director at Gartner. "You couldn't make it much tougher." But What Is a Platform? Further, while the plan sounds like an ideal marriage, despite the NYSE's and Euronext's public comments on technology consolidation, industry experts aren't clear on the exchanges' definition of a "platform." Thus, it is difficult to fully understand how the integration will take shape - and specifically what system traders can expect to use to trade equities and derivatives in the future. According to the NYSE and Euronext, by 2008 they plan to combine the NYSE Arca and NSC cash platforms onto one global cash platform. And by 2009, they plan to migrate the Hybrid model to the new global cash platform. But what is a platform? Is a platform a trading system, or is it the underlying infrastructure for the existing trading system? And what exactly does consolidating three trading systems onto one platform mean? Does it all mean that the three systems still will exist and run on a unified infrastructure? Does it mean that just one of the three trading systems will remain? Or does it mean that the Hybrid, Arca and NSC will no longer exist, replaced by a best-of-breed trading system? These are the questions being asked by many in the industry. An NYSE spokesman declines to clarify the NYSE Group's intentions, and Euronext CEO Theodore could not be reached for comment at press time. Joe Gawronski, COO at Rosenblatt Securities, an institutional agency broker and a member of the NYSE, contends there is confusion over the meaning of "platform" because there is a difference between the underlying technology and the market

3 structures. In Gawronski's view, when NYSE and Euronext executives say they will consolidate down to one surviving equity platform and one derivatives platform, they're talking about technology infrastructure - the three existing market structures (Arca, NSC and Hybrid) will survive. He adds that trading rules will be specific to each market. "Right now, on Euronext they may have the French and Portuguese markets on one technology platform," Gawronski points out. "That doesn't mean the Portuguese and French markets operate the same way." Nor do they use the same trading applications, rules or matching engine, he notes. While Gawronski believes that the various NYSE Euronext cash equity markets will run on the AEMS technology infrastructure, he maintains that multiple market structures and trading applications could run on the same platform/infrastructure. "That still means that Arca has its own rules and market structure, Euronext has various country markets with their own rules and the NYSE has its own rules," he says. But not everyone agrees with Gawronski. "When I think of a platform, it's not just hardware and infrastructure, [but] all the applications that go with it," says Bernard Donefer, associate director, Wasserman Trading Floor, Zicklin School of Business at Baruch, meaning that he believes the exchanges' intentions are that only one trading system will survive. "When they say one platform, I'm cynical." Gartner's Renshaw, who listened to the conference call in which Thain and Theordore outlined the consolidation plan, also believes that the exchanges intend to consolidate to one trading system. He notes that the surviving system likely will accommodate the Hybrid as it evolves, but he doesn't foresee Hybrid being around very long. "They're basically saying that Hybrid is a temporary solution," Renshaw asserts. "They'll get it going, and as soon as they have something better, they'll get rid of it." Redshaw predicts that Euronext's influence will push the NYSE into fully electronic trading, thus the Hybrid is not likely to emerge as the winning platform, he says. Redshaw explains that since the NYSE Group is a publicly traded company, the proponents of Hybrid - the former seat holders (i.e., specialists and floor brokers) - now have less influence. Which System Will Win? Although most industry sources don't believe the Hybrid will last, there is no consensus as to which of the other two cash platforms - Arca or NSC - might prevail. However, many industry executives, including Redshaw, believe that Atos will be granted the role to run the platforms. Redshaw contends that Atos, Euronext's IT arm, will win out over the other IT groups - including Securities Industry Automation Corp. (SIAC), which is part owned by the NYSE, and Archipelago - to handle the integration and maintenance. "The big challenge for someone from Archipelago is that Euronext has Atos Euronext Market Solutions

4 [AEMS], a joint venture between Euronext and Atos Origin," he says. "AEMS is an IT services conglomerate whose core competency is running technology and virtual networks, selling software to stock exchanges, selling interbank settlement solutions and running payment processing." Redshaw believes that a lot of the IT functions that Arca performs will be absorbed into AEMS. "If you're talking about a new platform to run the exchange on, I think it will be run out of AEMS," says the Gartner analyst. Another scenario is for the two IT organizations to split their responsibilities so that AEMS runs the data side and keeps the lights on, as well as sells software externally to other exchanges, while the Archipelago IT group looks after the plug-and-play architecture and designing the internal systems for the future. If Euronext's Atos does dominate, however, it likely will push the U.S. stock trading onto Euronext's NSC platform. Eric Goldberg, CEO of Portware, an execution management system, says, "It's probably reasonable if the NYSE becomes a fully electronic exchange, then it would run on Euronext, which is a fully electronic exchange with multiple currencies." So, Will There Be a Floor? Of course, Atos' influence as technology provider could affect the future of a trading floor. Andre Cappon, president and founding partner at CBM Group in New York, a general management consultancy specializing in the financial services industry, emphasizes the strength of NSC. "Euronext purchased the [NSC] software and they improved on it a lot," he points out. "It's their intellectual property," Cappon continues. "It's been tweaked to every market. It's a system that does not really have room for open outcry and I don't think it has room for specialists," he adds. "But the business model allows for market makers, so that means if you recast the specialists and call them market makers, maybe it works." But that outcome does not mesh with the NYSE's stated plans to complete development of the Hybrid market, which combines the floor with automated execution. "What happens to the NYSE trading floor?" asks Celent CEO Octavio Marenzi, who is based in Paris. "It sounds like he's throwing that out the window and we're going to use the Atos Euronext Market Solutions," he says, referring to NYSE Group CEO John Thain. But in public comments prior to the merger announcement, Thain said NYSE Group would leave Archipelago and the NYSE independent of each other, and the NYSE would run the Hybrid system alongside Archipelago. "With all of Mr. Thain's public comments, he'd have an awful hard time closing down the exchange floor," says Northern Trust's Driscoll. One Platform, Many Challenges

5 Applying either NYSE Arca or NSC to both European and U.S. stocks is not so simple, says Baruch's Donefer. "We're talking about many markets where the rules of engagement are different enough to make the methods we use not applicable," he adds. "If we had one platform, the regulators - the SEC, [NYSE Regulation] and the NASD - would be more likely to get involved." For instance, "The insider-trading rules are different; what's legal in terms of insider trading here is illegal in Europe," Donefer explains. "If they come up with this common platform, they'll end up running separate copies here in the U.S. and Europe in order to satisfy the regulators." In addition, equity trading experts, including Rich Korhammer, CEO of Lava Trading, say that NYSE Euronext cannot dismiss the U.S. technology because the market needs are different in the U.S. than in Europe. "They can't deploy the same technology in the U.S. as Europe because of the differences in needs," says Korhammer. "We have 10 or 20 different liquidity pools in the U.S. - Arca already routes out to multiple pools of liquidity for the same stocks, while Europe doesn't have the same problems with fragmentation as the U.S.," he asserts. "Most of the volume that trades in a European stock is on the Euronext exchange, whereas Microsoft is listed on Nasdaq, but it trades heavily on Archipelago and other venues away from Nasdaq," he says. "That competitive nature and fragmentation doesn't exist in Europe." But if NYSE Group maintains all three trading systems on top of the Atos technology, will it achieve the cost savings that are so crucial to the deal? "Without consolidation on a single platform, it has no financial merits," insists Celent's Marenzi. "That being said, it's somewhat of a contradiction for what John Thain has said in the past," the analyst says, adding, "The specialists are going to be asking lots of questions, such as, 'What do you mean we're going to be using French technology?'" Speaking at a recent conference, NYSE Group CTO Steve Rubinow said it was too early to discuss the details of how the NYSE Group's trading systems would be merged with Euronext's electronic trading platforms. However, he did say that whether it's Euronext or another entity, companies will be folded into the NYSE portfolio and that part of the NYSE's grand design is to be able to plug in technologies if there is a merger. "If a Euronext or Company XYZ comes along, we have to anticipate things like that happening and figure out how we will accommodate them and plug it into the central architecture," he said. Meanwhile, Bill Cline, managing director of Accenture's capital markets practice in North America and Asia-Pacific, says that with the pace at which things are moving at NYSE Group, he doubts "any of the longer-term decisions have been made with NYSE, Arca or Hybrid. Nor do I think the technology issues have been decided regarding Euronext." He adds, "The deal seemed to have come together very quickly - I would be surprised if anybody had a chance to look at the IT in any formal granular way." The Deal

6 On June 1, NYSE Group - operator of the New York Stock Exchange and NYSE Arca, the all-electronic equity and options marketplace - and Euronext agreed to combine their organizations in a $10.2 billion merger of equals, forming a publicly traded holding company to be known as NYSE Euronext. In addition to the NYSE - the world's largest stock exchange - and NYSE Arca, the new holding company will own the Amsterdam, Brussels, Lisbon and Paris stock exchanges, as well as Euronext.liffe, the electronic derivatives exchange located in London. If completed, the deal could pave the way for trading a variety of international stocks, bonds, options and derivatives through a single holding company that spans seven countries and six markets, with average daily trading volume of $100 billion. NYSE's CTO Discusses Arca Integration s the NYSE Group-Euronext deal was announced, in an interview with Advanced Trading's Ivy Schmerken in early June, NYSE Group chief technology officer Steve Rubinow was focused on the NYSE-Arca integration. He said that the Hybrid platform and Arca would run "side by side," but that any time there were two systems that didn't impact the customer, the NYSE would look to push them together. Later, speaking at the SIA Technology Management Conference in New York on June 20, Rubinow said he was heading up a project to combine the IT organizations of the NYSE, Archipelago and SIAC to rid them of duplicate systems. Referring to the underlying technologies that support the NYSE and NYSE Arca - such as databases, FIX engines, customer gateways and operating systems - Rubinow told the audience he would like to put the Hybrid and NYSE Arca on a single platform. "I'm a big fan of simplicity," said Rubinow. "It just makes sense all the way around. We've always said we're a multiple-product, single-platform company, and we're going to do our best to make it happen." Copyright 2004/5 CMP Media, LLC Privacy Statement