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Tickers in this Article: NYX
In volatile markets, it is helpful to remember that stock exchanges make money when investors make trades - any trades. The money is just as green when the trades are sell orders as when they are buy orders.

Global exchange leader NYSE Euronext (NYSE:NYX) showed in its third quarter earnings results that volatility has certainly been kind to its bottom line.

No Summer Doldrums
NYSE Euronext's Q3 2007 earnings rose an eye-popping 279% to $258 million from $68 million as compared to Q3 2006. After adjusting for expenses related to the April 2007 merger with Euronext and the March 2006 merger with Archipelago Holdings, exit costs and other non-recurring items, the resulting restated earnings of $202 million marked a 73% increase from $117 million in 3Q 2006 and certainly don't detract from the underlying strength of operations.

In its press release the company attributed the strength to growth across business lines, record trading volumes in the U.S. and Europe and expense control. Stock markets went through an intense cycle of fear and greed in August and September as the specter of a total meltdown in world credit markets gave way to relief when global central banks stepped in to shore up liquidity. This produced unusually high transaction volumes for the customarily quiet late summer period.

Not Your Father's NYSE
For much of its storied history dating back to the famous buttonwood tree on Wall Street in 1792 the NYSE epitomized the "clubby", old-money world of investing. Perhaps the signature event that brought the final curtain down on the old boys' club came at the end of 2005 when the exchange ended its longstanding practice of selling member seats. Less than three months later, the erstwhile members' club became a publicly-owned company through the merger with Archipelago Holdings, whose all-electronic ArcaEx market was a leader in stock, option and other derivative trading. (Did you know the first "stock exchange" didn't actually have any stock to exchange? To learn more, see The Birth Of Stock Exchanges and Getting To Know Stock Exchanges.)

Derivatives trading has grown rapidly and its importance in the capital markets has solidified over the past years. For the third quarter 2007, 25% of NYSE Euronext's net revenues came from its derivatives trading platforms.

Challenges Ahead
CEO John Thain and his management team have done a good job in positioning NYSE Euronext for leadership through effectively rolling out a broad and deep array of products and services in the cash and derivatives markets and through expanding its global footprint. Challenges remain, however. The company needs to deliver on its promised revenue synergies of $100 million and cost savings of $275 million arising from the Euronext merger. Much of that cost savings is related to technology, where the company has to retool its cumbersome legacy systems from the trading days of old into a seamless modern, integrated platform. (For more on acquisition indigestion, read Conglomerates: Cash Cows Or Corporate Chaos?)

Company president and COO Duncan Niederauer noted in a speech to financial professionals in September that the company needs to revamp its culture to become more client-centric. Finally, of course, competitors like Nasdaq and the London Stock Exchange are hardly sitting idle. Both exchanges continue to aggressively push ahead with their own acquisition and growth plans to gain market share. (To learn more on this rivalry, read The Tale Of Two Exchanges: NYSE And Nasdaq.)

A position in a stock exchange company can be a portfolio's best friend during volatile markets because, no matter which way the market moves, the exchange will make money.

NYSE Euronext has made some smart moves over the past couple years to consolidate a global leadership position across a range of markets from stocks to equity and fixed income derivatives. If the company can continue to meet the challenges it has set for itself we could expect to see strong results for many quarters to come.

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