investment report NYSE Group, Inc. (NYX) business overview competition

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1 NYSE Group, Inc. (NYX) business overview NYSE Group, Inc. is a New York City based company that operates multiple stock exchanges in the United States, including the New York Stock Exchange (NYSE) and NYSE Arca. The company is a provider of securities listings, market data, and investment vehicles and services. The group originated in Since then, it has grown into one of the world s largest and most liquid equities markets. The New York Stock Exchange ( Big Board ) uses a Hybrid Market structure, where customers choose between a traditional continuous auction trading method and an automatic electronic trading method. It is the world s largest and most liquid equity market, offering investors professional management, liquidity and trading, portfolio diversification, bonds, execution services, structured products, and information products. NYSE Arca, formerly known as Archipelago Exchange, is an entirely electronic stock exchange, allowing customers to trade directly electronically from multiple U.S. market centers. NYSE Arca offers market data products, analytical tools, equity securities listed on multiple U.S. equities markets, as well as options products. NYSE became the NYSE Group after it acquired Archipelago Holdings in a reverse takeover on March 7, The NYSE Group became a publicly traded for-profit company on its own stock exchange on March 8, As of December 04, 2006, the NYSE traded over 1.9 billion shares valued at over $72 billion. The NYSE Group is currently overseen by Marshall N. Carter, Chairman of the Board, and John A. Thain, the Chief Executive Officer since December competition competitor company description implications for NYX Nasdaq (NDAQ) Nasdaq operates the Nasdaq stock market and is a provider of securities listing, trading, information products and services. It lists an array of industries, including health care and technology. Nasdaq operates according to a two-tiered system: Nasdaq National Market, which included 2645 companies as of December 31, 2005, and The Nasdaq Capital Market, which included 563 companies as of December 31, the buyer and the seller. Chicago Mercantile Exchange (CME) investment report The Chicago Mercantile Exchange allows customers to buy future and current contracts in four areas: interest rates, stock indexes, foreign exchange and commodities. In 2005, the company derived 76% of its Nasdaq is known to generally take on more technology-based companies. As such, its companies are considered to be more volatile and growth oriented than the well established companies listed on the NYSE. Also, trading on Nasdaq requires a dealer as the middle man, whereas trading on NYSE often occurs directly between CME is the premier distributor of many investment reports. It rivals the New York Stock Exchange s ability to generate revenue from these financial services.

2 The American Stock Exchange (AMEX) financials revenue from fees associated with trading its products. Trading is conducted in two ways: an open outcry format and the CME Globex electronic trading system. The American Stock Exchange is the second largest stock exchange for options in the world. American stock exchange offers consumers three varieties of stock options to choose from; a wide variety of listed equities, an extensive options market, and exchanged traded funds. The companies on AMEX are known to be smaller than those on NYSE or Nasdaq. AMEX is smaller than NYSE, but it is still considered prestigious. income statement A few important factors stand out when viewing the NYX income statement. First, operating income has more than tripled in the past year, rising from $23.53M in the quarter ending on September 30, 2005 to $85.41M in the quarter ending on September 30, Therefore, the firm has a greater amount of earnings to divide among its shareholders. During the same time, gross profit more than doubled, from $70.69M to $164.35M. The gross margin also rose substantially, signaling that the firm has greater security regarding its operating costs; the operating margin also rose substantially. $ Million 3 Months Ending Months Ending Months Ending Months Ending Months Ending Revenue Other Revenue, Total Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Admin Expenses, Total Research & Development Depreciation/Amortization Interest Expense (Income) Net Operating Unusual Expense (Income) Other Operating Expenses, Total Total Operating Expense Operating Income balance sheet

3 The current ratio for the first quarter of 2006 is 1.98, signaling that the company can easily fund its current liabilities. NYX currently has no debt; hence the debt-to-equity ratio is also 0. $ Million As of As of As of As of Cash & Equivalents Cash and Short Term Investments , , Accounts Receivable Trade, Net Total Current Assets 1, , , , Property/Plant/Equipment, Total-Gross Long Term Investments Other Long Term Assets, Total Total Assets 3, , , , Accounts Payable Accrued Expenses Current Port. of LT Debt/Capital Leases Other Current Liabilities, Total Total Current Liabilities Long Term Debt Total Long Term Debt Total Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities 1, , , , Common Stock, Total Retained Earnings (Accumulated Deficit) Other Equity, Total 1, Total Equity 1, , , Total Liabilities & Shareholders Equity 3, , , , Total Common Shares Outstanding statement of cash flows The income in June 2006 is positive and has increased since March The cash from operations, or the cash generated from day-to-day business operations, has also increased substantially. The cash from operations was negative during the third quarter of 2006, possibly because of NYX s $10 billion acquisition of Archipelago Holdings, LLC. The loss of cash from operating activities corresponded to a decrease in the stock price. $ Million 3 Months Ending Months Ending Net Income/ Starting Line Cash from Operating Activities Cash from Investing Activities Cash from Financing Activities valuation

4 The price of NYX has been increasing steadily during the past two years. The stock rose from $20 in January 2005 to $50 in January 2006 and closed in at $100 (December 2006), experiencing a 5 fold increase over its IPO price. Part of this increase can be attributed to NYSE s effective management and successful initiatives in cutting costs. The increase can also be attributed to the general trend of rising stocks prices since As of December 4, 2006, the stock had a PE ratio of approximately 110, which could signify that the stock is overvalued, or that shareholders expect high growth. In either case, investors seem to be confident in the NYSE Group, although it is hard to justify trading a stock with such high PE ratio. The expected PE ratio for 2007 is approximately (Yahoo Finance), and expected growth rate will be around 42.1%. These growth rates are due to NYSE s increased use of automated electronic methods in addition to its active expansion in recent years and simplification of its fee structure. Key S&P NYX NDAQ CME Industry Sector implications for NYX metric 500 P/E NYSE has a relatively high PE

5 Ratio Price-tobook ratio PEG ratio (5- yr expected) ratio, which means that it is not very attractive from a valuation standpoint, because the stock could be overvalued. However, it could also signify that investors expect high growth in earnings and are willing to pay more for the stock. New York Stock Exchange's comparatively high Price to Book ratio reflects the fact that investors value the company much higher than its book value. A PEG ratio of 1 signifies that a company is fairly valued, a ratio of much higher than 1 signifies an overvalued company. NYSE's PEG ratio is higher than CME and lower than NDAQ, so while it may be overvalued, it is still comparable to the other big companies in the industry. investment opportunities fee structure NYSE is making big changes to its fee structure in order to simplify clients fees and boost profit. They have eliminated the $750,000 monthly trading fee cap for customers, established a flat fee of $ per share for NYSE-listed securities trading on the exchange, and replaced specialist commissions with a pay-for-performance type revenue-sharing program. NYSE also plans to waive fees of as much as $250,000 for both American and foreign companies that switch over from other exchanges. Finally, NYSE plans to charge a fixed price of $50K for trading licenses in 2007, rather than relying on prices set by an auction. These fee eliminations will make NYSE look more attractive to companies from other markets. The fee structure simplifications will result in a cost reduction for most of the companies that trade on the NYSE, which may mean that NYSE will lose revenue in the short run. However, we will most likely see an increase in NYSE s trading volume which will lead to a revenue growth in the longer term. Euronext merger Shareholders are voting on the NYSE Group s $15 billion takeover bid on December 19. Euronext s board is recommending the offer, and it has been speculated that Euronext s shareholders will support the deal. If the takeover is successful, NYSE will have created the first trans-atlantic market. It will be able to profit from companies trading in European markets, which trade under the more relaxed European regulations. Many companies that do not want to list under U.S. regulations and listing costs will go to Europe instead, and NYSE Euronext will be able to increase their activity. However, NYSE needs to be careful about managing the integration and regulation of NYSE Euronext.

6 regulations Business has won the case to ease one of the most controversial requirements mandated by the Sarbanes-Oxley corporate-reform law, that companies must review their systems for ensuring accurate financial reports and then have them tested by outside auditors. This law has discouraged companies from going public in the past, so changes in this regulation will be good news for U.S. stock exchanges like NYSE. hybrid market NYSE is using a new market model that combines automatic electronic trading with the traditional floor-based auction method. The hybrid market combines the best aspects of the auction and automatic models to give customers more choice and increase their access to NYSE liquidity. In addition, the hybrid market will prevent a drop in NYSE s market share if Reg NMS, a reform proposal that favors electronic operation, goes through. Increasing electronic trading should increase trade volume for NYSE and result in revenue growth. investment risks volatile stock price On December 1, 2006, NYX was trading at $96.60, but only ago on September 1, NYX was only trading at $ The current high stock prices could be due to shareholders expecting high growth in NYSE s future earnings, or it could be due to a bull market in which the stock is overvalued. Forecast increases in trading volume may already be reflected in current stock prices. Both scenarios are dangerous. High growth expectations reflect news already being incorporated in the stock, which signals a possibility of slower stock price growth in the future. On the other hand, if the stock price is overvalued, the trend could reach a peak and stock prices could start decreasing at any time. Euronext merger The success of the merger depends on NYSE s ability to regulate and integrate Euronext into the NYSE system. The deal is mainly focused on technology savings, calling for a more efficient technology structure by These savings due to technology will increase NYSE s market capitalization. However, success depends on NYSE s ability to manage the risks and returns of technology. full financial statements From Google Finance income statement In Millions of USD (except for per share items) Ending Ending Ending Ending Revenue Other Revenue, Total Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Admin. Expenses, Total

7 Research & Development Depreciation/Amortization Interest Expense(Income) - Net Operating Unusual Expense (Income) Other Operating Expenses, Total Total Operating Expense Operating Income Interest Income(Expense), Net Non-Operating Gain (Loss) on Sale of Assets Other, Net Income Before Tax Income After Tax Minority Interest Equity In Affiliates Net Income Before Extra. Items Accounting Change Discontinued Operations Extraordinary Item Net Income Preferred Dividends Income Available to Common Excl. Extra Items Income Available to Common Incl. Extra Items Dilution Adjustment Diluted Weighted Average Shares Diluted EPS Excluding Extraordinary Items Dividends per Share - Common Stock Primary Issue Diluted Normalized EPS balance sheet In Millions of USD (except for per share items) As of As of As of As of Cash & Equivalents Short Term Investments , Cash and Short Term Investments , , Accounts Receivable - Trade, Net Receivables - Other Total Receivables, Net Other Current Assets, Total Total Current Assets 1, , , , Property/Plant/Equipment, Total - Gross Goodwill, Net Intangibles, Net Long Term Investments Other Long Term Assets, Total

8 Total Assets 3, , , , Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Total Current Liabilities Total Long Term Debt Total Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities 1, , , , Common Stock, Total Additional Paid-In Capital 1, , , Retained Earnings (Accumulated Deficit) Treasury Stock - Common Other Equity, Total Total Equity 1, , , Total Liabilities & Shareholders' Equity 3, , , , Shares Outs - Common Stock Primary Issue Total Common Shares Outstanding statement of cash flows In Millions of USD (except for per share items) Ending Ending Ending Net Income/Starting Line Depreciation/Depletion Amortization Deferred Taxes Non-Cash Items Changes in Working Capital Cash from Operating Activities Capital Expenditures Other Investing Cash Flow Items, Total Cash from Investing Activities Financing Cash Flow Items Total Cash Dividends Paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Cash from Financing Activities Foreign Exchange Effects Net Change in Cash Cash Interest Paid, Supplemental Cash Taxes Paid, Supplemental

CHAPTER 3. How Securities are Traded INVESTMENTS BODIE, KANE, MARCUS. Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER 3. How Securities are Traded INVESTMENTS BODIE, KANE, MARCUS. Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 3 How Securities are Traded INVESTMENTS BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved. INVESTMENTS BODIE, KANE, MARCUS 3-2 How Securities