The New York Stock Exchange and its German equivalent, the Deutsche Börse, announced a merger on Tuesday. The deal values the parent company of the former at $10 billion, but the Associated Press notes that “despite its fame and its fabled floor, [the NYSE] is a lousy way to make money.” How does the exchange bring in revenue, anyway?
Fees. For most of its history—which dates back to 1792—the NYSE expected traders to buy and sell stocks in its Wall Street building. They paid for the right to do business there. Although most trading now occurs electronically, the NYSE is still essentially a venue for financial transactions. If a company wants to be listed on the exchange (thus allowing traders to buy and sell its stock through the NYSE), it must pay yearly fees of up to $250,000. When traders move stock, they pay a tiny fee per 100 shares. The trading of futures, options, and other derivatives also requires a fee.
Levying fees for stock transactions isn’t a high-margin business. According to the Associated Press, the exchange makes just three-hundredths of a penny for every 100-stock order. To make matters worse, trade volume at the NYSE has fallen dramatically in recent years due to competition wrought by technology. There used to be comparatively few places to trade, but today there are lots of electronic venues (Bats Global Markets, Getco, and Direct Edge, among others). *
Industry watchers believe that NYSE and Deutsche Börse are merging at least in part to consolidate control over futures markets. Any exchange that handles futures—like both NYSE and Deutsche Börse—must own “clearing houses” responsible for accepting deposits from brokers to cover their balances and making sure all contracts are fulfilled. (For more information on clearing houses, click here.) That makes futures trading a more complicated business for an exchange—and thus a less competitive and more lucrative one. In the fourth quarter of 2010, revenue from derivatives accounted for 33 percent of the total for the NYSE, up from 29 percent in the same quarter the year before.
In addition to charging fees for trades (of stocks or futures) and for the privilege of being listed, the NYSE sells data—who sold what, when, for how much—to financial researchers and news companies. It also increasingly makes money by selling trading software to money managers and allowing big-deal firms to install their computers closer to the actual exchange, so their electronic trade requests will arrive milliseconds earlier than competitors’.
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Explainer thanks Menachem Brenner of New York University and Robert Litan of the Kauffman Foundation.
Clarification, Feb. 17, 2011: This paragraph originally mentioned spreads rather than exchange fees. The latter is more relevant. (Return to the revised sentence.)