In a few weeks, InterContinental Exchange (ICE) is expected to complete the $8.2 billion acquisition of NYSE Euronext, an event leading Wall Street to speculate on the future of NYSE Technologies, the exchange's commercial technology division.
The uncertainty arises not because NYSE Technologies has built a sprawling technology portfolio to boost tech revenues, but because the question is: Does ICE chairman Jeff Sprecher value it? There are many theories circulating on which units ICE will retain and which ones will be spun off.
[The Exchange Diversification Play]
Sprecher already has conveyed he's buying NYSE Euronext to gain control over NYSE Liffe, the London-based futures and options exchange, to boost ICE's derivatives business. He also plans to spin off NYSE Euronext's European bourses, but assured NYSE floor traders he would hold on to the U.S. equity trading business.
Last year, Stanley Young, then CEO of the NYSE Technologies unit, promised that the group could generate $1 billion in revenues by 2015. That was a tall order since 2011 revenues were $490 million. In 2012, technology and information services brought in $473 million. For the second quarter of 2013, NYSE Technologies pulled in $114 million, a decrease of $5 million, or 4% compared with the second quarter of 2012.
"It's a good business," says Vikas Shah, managing director of investment banking at Rosenblatt Securities. But over the course of the years, "NYSE Technologies has bought a lot of assets that may or may not be core to ICE," says Shah. While there are some assets that may be core to ICE's business, which they will keep running, Shah says there may be some assets that aren't core, which ICE may decide to sell.
NYSE Technologies has made a number of acquisitions over the years, including Transact Tools for connectivity to brokers via the FIX Protocol and Wombat to get into the market data distribution space. Late last year, it bought a 25% stake in Fixnetix, a U.K.-based European managed service provider that offers hosting services, market data, network connectivity and colocation.
In addition, NYSE Technologies spent $450 million building two huge data centers in Mahwah, N.J., and Basildon, England, where they offer colocation services. "The density of customers who want to go there is ridiculously low," says an executive with a technology vendor, noting that Mahwah is less than 15 miles from Equinix, a neutral data center that hosts other exchange matching engines and offers access to telco and other vendors.
There also have been some missteps. When NYSE Technologies unveiled Mahwah's Liquidity Center, it didn't allow customers to connect with third-party vendors directly. It required vendors to go through an "access node" to connect with the SFTI network, which in turn would go to Mahwah. "'We're such a big market that people have to colocate with us and we'll charge up the wazoo,'" quips the third-party vendor, speculating on the NYSE's thought process, adding that this approach resembled the old specialist model. NYSE Technologies declined to comment for this story. The third-party vendor requested anonymity.
That strategy backfired on NYSE Technologies as many financial firms placed their trading models at Equinix's NY4, a neutral data center in Secaucus, N.J. Reversing its policy, NYSE's Technologies opened Mahwah up to outside vendors in 2012's fourth quarter.
"ICE now has come in and said, 'We don't give a hoot about NYSE Technologies. We give a hoot about Liffe. We bought NYSE Euronext not for the NYSE, not for Wombat, and SFTI,'" says the vendor.
In another interesting twist, last year Equinix showed interest in the NYSE Technologies data centers, particularly the one in Basildon, but offered 50 cents on the dollar, according to the vendor source.
With lower volumes since the financial crisis, it's not clear that exchanges need or want to operate their own data centers. "In Equinix's data center, there are a lot of different exchanges and NYSE has their access node there," says Stewart Orrell, managing director of Equinix's global capital markets.
With Young's departure, NYSE Technologies has undergone management changes, hiring Jon Robson, a longtime market data executive from Thomson Reuters, to take the CEO role, and Varghese Thomas, previously with rival data center provider Savvis, as global head of infrastructure services. One area that NYSE Technologies is targeting is shared infrastructure and the cloud. In June 2011, it launched the Capital Markets Community Platform to provide brokers, hedge funds and buy-side firms with on-demand access to its portfolio of services, including SuperFeed, the Risk Management Gateway and the Transactions Hub.
It remains to be seen what the future holds. "ICE is going to evaluate the different businesses the NYSE was in and at some point make a determination to continue marching forward or divest," says Richard Repetto, principal at Sandler O'Neill + Partners. Another issue is that ICE has traditionally been more proprietary about its technology.
"The heavy tech business that NYSE is in, ICE itself is not in," observes Repetto. "The NYSE has really built out its technology offering. I think over time, ICE management is going to evaluate whether it's a business they want to continue to focus resources on." Analysts have viewed the business as a question mark, says Repetto. "They were growing and margins were expanding and then the economic downturn hit."