It may look like an old-fashioned stock exchange, complete with trading floor and opening bell, but the company behind the New York Stock Exchange is increasingly about derivatives. This business made up just under half of NYSE Euronext's operating income last quarter.
What used to be the NYSE group spotted which way the wind was blowing when it acquired Euronext, the European network of bourses, in 2007, which gave it the London-based Liffe futures and options exchange. But it is not the only exchange morphing into a derivatives shop. BM&F Bovespa is the product of a merger of the Brazilian stock and commodity derivatives exchanges. The Toronto exchange is now in bed with the Montreal derivatives exchange. Australia's ASX, where 24 per cent of revenue comes from derivatives trading and clearing, combines the stock exchange and Sydney futures exchange.
This is because financial products such as euribor futures and options on Liffe or eurodollar futures at the Chicago Mercantile Exchange are where the money is. Volumes are growing. At NYSE Euronext, net revenue in derivatives trading (and the clearing fees associated with it) rose 34 per cent year-on-year in the latest quarter. But the showstopper is operating margins of 62 per cent, compared with 39 per cent for the more mundane business of cash equities and listings. The latter is commoditising rapidly – grinding down margins – thanks to competition from BATS Exchange, Direct Edge and broker networks run by Knight, the big US broker that handles more volume daily than Nasdaq, NYSE's biggest rival. By contrast, blockbuster derivatives tend to be traded on one exchange, with clearing locked in to that exchange. Regulators have yet to challenge that model. With volatility back, exchanges with the right derivatives mix look like they might have the perfect hedge.