By Josh Ludwig, ZGAS Editor-in-Chief Emeritus
On April 22nd, Thomas Farley of the New York Stock Exchange (NYSE) spoke at Baruch College as part of the Mitsui USA Lunch-Time Forum presentation series, sponsored by the Weissman Center for International Business. Director of the Weissman Center for International Business Prof. Terrence Martell, also currently an independent director of ICE, gave Mr. Farley a warm introduction at the beginning of the presentation. Mr. Farley, Chief Operating Officer of NYSE (a wholly-owned subsidiary of IntercontinentalExchange Group, Inc.), has worked at parent company ICE since 2007. Mr. Farley’s presentation was billed as a discussion of ICE’s acquisition of NYSE, and subsequent integration of the historic exchange into the parent company. This integration was presented from four vantage points: the political and policy environment for, strategy for, management of, and country and regional perspectives on international business.
Mr. Farley divided his presentation into three segments: his personal introduction, a strategic and operational perspective on the integration of NYSE, and what he called the “growing pains” of integrating NYSE and its culture. After attending Georgetown, he worked as an entrepreneur in a firm that built financial software designed to value products such as jet fuel hedge contracts. Working in the quantity futures industry early on his career, Mr. Farley was fortunate to cross paths with Jeffrey Sprecher. As Mr. Sprecher rose through ICE and became Chairman and CEO, he eventually reached out to Mr. Farley, who accepted a job offer from him to become President and Chief Operating Officer of ICE’s U.S. futures business. Based in Atlanta, GA and founded in 2001, ICE introduced electronic futures trading to financial markets (prior to this, futures had been traded on an exchange floor for the past 160 years).
When ICE purchased NYSE, the former was worth $13 billion, while the latter was worth $11 billion. Mr. Farley compared some of ICE’s prior acquisitions to NYSE including the floor-based New York Board of Trade and credit-default swap exchange Creditex, which each posed separate challenges related to integration into the parent company. In the acquisition of NYSE, ICE absorbed three distinct businesses in addition to the New York Stock Exchange including the London International Futures Exchange (LIFE), Euronext, and NYXT. ICE’s strength was in running futures markets, and it was looking to expand into interest rate futures by acquiring LIFE. In the acquisition of this business, ICE sought to take out layers of fixed cost in the consolidation: LIFE trading was moved under ICE technology, LIFE trades were now cleared under ICE’s own clearinghouse, and LIFE itself was shut down, leading to employee reductions. On the other hand, ICE recognized it was unfamiliar with the European regulation that governed the business of Euronext, and ultimately divested itself of this exchange. NYXT duplicated technology services already sold by ICE, and the Atlanta-based exchange sold this unit after the acquisition.
The acquisition of the New York Stock Exchange involved the difficult task of integrating both three equities exchanges and two options exchanges. ICE had never run an equities exchange and, as Mr. Farley put it, knew “less about options.” However, ICE recognized that it had a strong core competency in running exchanges. ICE viewed the New York Stock Exchange as an incredible brand—one that could also help in its greater dealings with customers and regulators. Most New York Stock Exchange employees were retained for a discrete period of time immediately following the acquisition to help with the transition. ICE ultimately saw the opportunity to modernize the technology of the business, which had legacy systems from its own prior acquisitions and long history of operations.
The “growing pains” of the NYSE integration were mainly related to cultural differences between the New York Stock Exchange and ICE. These differences pertained to how employees behaved, interactions between staff, and company values. On one hand, the New York Stock Exchange had a command-in-control hierarchy. There were specific lines of command and responsibility, and the company was run in this way like the U.S. military (this also led to organizational inefficiencies, and ICE later removed five layers of senior management during the integration process). The culture of this business not surprisingly inspired little debate in the workplace. Payroll was less than at other exchanges, but there were often benefits to employees such as free food at work and frequent opportunities to work at home. On the other hand, ICE functioned like an “amoeba,” as Mr. Farley described—employee hierarchy had little to do with the flow of information. ICE emphasized employee growth and development— “mentorship in both directions” was encouraged, and issues were debated across employee ranks. In addition, cross-dimensional collaboration was a major feature of the ICE workplace, and work at home was discouraged. Employee pay was comparatively higher and varied with the success of the parent company, but ICE did not offer the same benefits to employees that NYSE did.
Mr. Farley discussed the process of integrating the New York Stock Exchange with regard to transforming company culture. He emphasized the importance of stressing to NYSE employees how ICE would do business going forward. Mr. Farley suggested that bonuses could be tied to how well NYSE employees conform to the new ICE culture as well. He mentioned a strategy of “swapping” employees across NYSE groups and divisions to help break the sense of the old company culture and introduce a new work environment. To this extent, Mr. Farley also made employee reductions at the New York Stock Exchange and hired new replacements to spearhead the acculturation of the acquired exchange. He also had a goal of recognizing stars in the New York Stock Exchange partially for purposes of motivating and demonstrating the rewards for talent and stellar work performance to new employees of the consolidated company. Above all, Mr. Farley stressed the importance of being “firm” with the acquired New York Stock Exchange and its employees in the imposition of ICE’s culture. In this way, ICE and Mr. Farley would ultimately have to be unbending and uncompromising in the acculturation of its acquisition.
There were several notable questions posed by audience members to Thomas Farley during the question and answer session that followed his discussion. In response to a question about the history and future of equities exchanges, Mr. Farley mentioned that floor-trading constitutes less than one percent of trading in the United States, and can be an effective forum for openings and closings. 60 percent of trading is done through Nasdaq, NYSE, and BATS, and 40 percent of trading is done off-exchange. With regard to the future of exchanges, Mr. Farley commented that the history of exchanges has been one of fragmentation and consolidation. Although there has been a large amount of consolidation in the industry in recent years, fragmentation is starting to come back. There was also a question about the future of the retail stock investor. Mr. Farley commented that there could be a total rethink of the retail market in the future, stressing that discount brokerages do not necessarily get the best price from hedge funds or high frequency traders when submitting orders through retail aggregators. Finally, in response to a question about the market for initial public offerings (IPOs) on the New York Stock Exchange, he remarked that the market has changed over the years. Unlike years ago, entrepreneurs are not as eager to go public on the New York Stock Exchange. Although legislation such as the Jobs Act have encouraged IPOs by not requiring the submission of all financials, the Sarbanes-Oxley Act has put huge regulatory and compliance burdens on public companies. As a result, many small to medium companies are avoiding IPOs, and there is consequently less coverage of this sector by investment banks and research houses.
In charge of an inordinately large project, Tom Farley has labored to seamlessly integrate NYSE into ICE since the parent company’s acquisition. Mr. Farley notably did not discuss the more concrete, practical implementation of the acquisition, including the integration of the New York Stock Exchange’s old legacy systems. Aside from this issue, he painted a vivid picture of consolidation trends in the industry of securities exchanges from the perspective of his employer. ICE Director Terrence Martell and the Weissman Center for International Business were pleased to host Mr. Farley. The Weissman Center for International Business is also a sponsor of the Zicklin Graduate Accounting Society.
Hello ZGAS Members,