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The Takeover of the NYSE Signals The Age of Derivatives Over Stocks

12/23/2012
Robert Lenzner
Forbes Staff

Comes the revolution. The 12 year old Atlanta-based Intercontinental Exchange will pay $8.2 billion to absorb the over 200 year old Big Board, The New York Stock Exchange– once the absolute center of capitalist democracy, the place where your Aunt Sadie bought and sold 100 shares of American Telephone or General Motors or Exxon or Johnson & Johnson.

Rest in peace NYSE. A marketplace in a gated, secluded section of Atlanta– home of “Gone With the Wind”– will be the owners of the citadel at the corner of Broad and Wall Street, just across from the Federal Reserve building where George Washington was sworn in and just across the street from the J.P. Morgan building where radicals set off a bomb so many decades ago.

Today, as individual investors buy and sell common stocks less and less, the transaction symbolizes the rapidly advancing utilization of vehicles that are too esoteric for the general public to comprehend– futures contracts and options on the direction of interest rates, or oil and natural gas prices, or metals and agricultural products like wheat and corn, or precious metals like gold and silver, and especially credit instruments like mortgages and bank loans.

The proposed deal is also a signal that global financial markets in Asia and Europe have become as crucial and ruling as prices in New York and Chicago, where commodity products have been traded.

It means that short term trading, which contributes at times to volatility, and t he process of hedging one’s bets have become essential for the trading practices of multinational corporations, giant financial institutions and hedge funds, which go in and out of the markets at will. It means that with the volume of derivatives replacing stocks, there will be more leverage, larger amounts of risk taken through the short-term borrowing of funds– than existed in the past.

It means a major challenge for the regulators like the CFTC, the Commodities and Futures Commission, as well as British, Swiss and Asian regulators to keep track of the burgeoning volumes of unique contracts.

JP Morgan, Jacob Schiff, Charles Merrill, the Salomons, the Goldmans and the Sachses, Douglas Dillon and Robert Lehman must all be turn in in their graves as the brash newcomers from the deep south take over the throne of finance.

http://www.forbes.com/sites/robertlenzner/2012/12/23/the-takeover-of-the-nyse-signals-the-age-of-derivatives-over-stocks/