Slate – The newly public New York Stock Exchange just unveiled a $10 billion offer for Paris-based Euronext, which owns securities exchanges in France, Holland, Belgium, Portugal, and England. Meanwhile, Nasdaq last week announced it had amassed a 25 percent stake in the London Stock Exchange.
On the surface, these transactions seem to represent American triumphalismâ€â€well-capitalized U.S. firms leading a process of globalization, the new financial world consolidating the old world.
But the truth is a little more complicated. Both these bids are defensive moves. NYSE and Nasdaq, the two exchanges that ruled global finance in the 1990s, are now desperate not to be left behind in the new world of global finance that they helped create. Sure, half the population owns stocks, and common stocks are the investment of choice for mutual funds, pensions, and hedge funds. But they’re not nearly as hot as they used to be. And in the area that has emerged as the next big thing in securitiesâ€â€derivativesâ€â€the NYSE isn’t a big player.
Derivatives are financial instruments that derive their value from the value of another security or object. Futures contracts on pork bellies, crude oil, sugar, or copper, options on Wal-Mart or the S&P 500, and a bewildering array of securities linked to the movement of currencies, interest rates, housing prices, or even eventsâ€â€like the likelihood of a company defaulting on its credit. All these are derivatives.
The volume and investor interest in derivatives have soared in recent years for a variety of reasons, in part because stocks of big companies have been boring and less volatile. It’s difficult for professional traders to find much of an edge in the trading of Wal-Mart or General Electric when they simply move sideways over a several-year period. Meanwhile, commodities such as oil, natural gas, gold, platinum, copper, and ethanol have become highly volatile. The main way to play these markets is through derivatives. And the explosion of government and corporate debt in recent years has led to the development of new products that allow investors to assume or hedge interest-rate risk.
