Nasdaq to buy eSpeed bond platform for $750 million

April 1, 2013 05:09 PM
BGC shares rose 37 percent

Nasdaq OMX Group Inc. will buy eSpeed, the electronic trading system for U.S. Treasuries, from BGC Partners Inc. for about $750 million in cash, giving the second-largest U.S. stock market a foothold in fixed income.

BGC shares rose 37 percent in trading after the market closed. Nasdaq will also issue about 15 million common shares over 15 years as part of the acquisition, pushing the potential value of the transaction to $1.23 billion, according to e-mailed statements by the two companies. ESpeed, founded by Cantor Fitzgerald LP in 1996, is used by banks worldwide to trade bonds and currencies.

Robert Greifeld, Nasdaq’s chief executive officer, is joining other exchange executives using takeovers to boost profit amid declines in stock trading. The operator of the biggest American stock trading venue, NYSE Euronext, agreed in December to be acquired by commodity exchange InterContinental Exchange Inc. for about $8 billion.

“The U.S. Treasury market is the most electronic of the fixed-income markets,” Greifeld said in an interview today. The market “functions in many ways, shape and form like an exchange,” he said. “As customers make their decisions, we’ll be in a strong position to fulfill their needs. We are diversifying in a measured way.”

BGC Shares

BGC’s stock dropped 59 percent over the last two years to $3.85 at the close of trading today, according to data compiled by Bloomberg. The shares jumped as high as $7.57 after exchanges closed and was trading at $5.26 as of 6:03 p.m. in New York.

The electronic trading platform for on-the-run U.S. Treasuries, including related market data and co-location businesses that Nasdaq is buying, generated about $100 million of revenue last year, less than 6 percent of BGC’s total, Howard Lutnick, its chief executive officer, said in the statement. The total sale may be about as large as BGC’s fully-diluted market value, he said.

“We think that the market was clearly under-valuing the assets of the company,” Lutnick said. “This transaction should better enable investors and analysts to place an accurate valuation on BGC’s assets post-closing.”

BGC, part-owned by Cantor Fitzgerald, has been diversifying into commercial real-estate by buying a series of brokerages as bond trading slows. It will keep its voice and hybrid brokerage and electronic business for off-the-run Treasuries and other fixed-income products, the company said.

‘Huge Deal’

“For BGC, this is a huge deal because their all-in price was higher than the market capitalization was,” said Jillian Miller, an Atlanta-based exchange analyst at BMO Capital Markets, said in a telephone interview. “BGC saw this as an opportunity to sell off this piece that isn’t affected by the regulatory environment and realize some value for it.”

Moody’s Investors Service said Nasdaq’s Baa3 senior rating may be cut following the eSpeed deal. The transaction will increase the exchange’s debt by $1 billion and cause a “deterioration in its financial profile,” according a statement from the ratings company. The purchase will be funded with cash and debt, Nasdaq said.

Fully electronic volume in the rates market, which includes Treasuries and European and Canadian sovereign debt as well as overnight repurchase agreements, interest-rate swaps and futures on eSpeed, declined 19.8 percent for the last three months of 2012 from the same period the year before to $9.7 trillion, according to BGC’s 10-K report filed March 12.

Total volume, including electronic and so-called hybrid volume conducted by BGC brokers, rose 15.6 percent to $44.4 trillion during the same period, the report said.

Nasdaq Trading

Nasdaq OMX’s share of trading in equities has fallen since 2007, when 46.1 percent of volume in Nasdaq-listed companies occurred on its main market. About 23.3 percent was done on its main market in the last quarter, according to data compiled by Bloomberg. Altogether, Nasdaq OMX has had 18.4 percent of all equities trading across its three exchanges in the first three months of this year.

While shares of Nasdaq have climbed 61 percent since the end of 2009, they remain down 36 percent from their 2007 high of $50 on Dec. 26, 2007.

New York-based Nasdaq plans to add products to the eSpeed platform as markets evolve, Greifeld said in a telephone interview today. The deal will add to earnings in the first 12 months after it is completed in the middle of the year.

BGC Partners was created in April 2008 when Cantor Fitzgerald LP combined eSpeed with its London-based broker- assisted bond trading unit. Cantor founded eSpeed during the dot-com rally of the late 1990s and took it public in 1999.

Fixed Income

“We are establishing our foothold in the fixed-income market as it grows,” Eric Noll, Nasdaq’s Executive Vice President, Transaction Services U.S. and U.K., said in an interview. “This is an obvious launching pad. And while initially we are very focused on the U.S. Treasury market, we’re always going to be looking at what’s next.”

Swings in government bonds have been “artificially depressed” by Federal Reserve asset purchases, Nasdaq said in the release. Volatility in Treasuries as measured by Bank of America Merrill Lynch MOVE index has averaged 58.74 this year, down from 79.42 in the first three months of 2012.

Fully electronic volume on the eSpeed and BGC Trader system, including new products, was $48.2 trillion for the year ended December 31, 2012, down 15.7 percent from $57.2 trillion for 2011, BGC said in the 10-K. Combined voice-assisted and screen-assisted volume for the year for 2012 was $190.7 trillion, down 1.8 percent from 2011.

Electronic Transactions

The number of fully electronic transactions in Treasuries declined 35 percent to 3.2 million in the last three months of 2012 from the same period the year before, while hybrid transactions grew 15.5 percent to 619,000 during the period.

The purchase comes as Greifeld seeks to push into European derivatives, dominated by Deutsche Boerse AG and NYSE’s Liffe exchanges. The company is setting up a London market called NLX, buying a 25 percent stake in The Order Machine, a Dutch alternative securities-trading system focused on stocks and equity derivatives, and seeking a greater share of energy products in Germany.

Nasdaq also raised its stake in LCH.Clearnet Group Ltd., the world’s largest interest rate-swap clearinghouse, expands in the region and diversifies its business.

Bloomberg News

About the Author