Neat periods of time are of course an artificial way to assess the development of an industry. But with the publication of this fifteenth edition of the Handbook of World Stock, Derivative and Commodity Exchanges it is interesting to look back five years, to the 2000 edition, to see how the world looked then.
Some things don't seem to change. Five years ago the London Stock Exchange was contemplating a merger with another exchange – and at the beginning of 2005 it was being courted by two suitors. The difference this time round is that the proposed merger has attracted the attentions of the UK competition authorities, and the outcome of their deliberations will be viewed with keen interest by the exchange industry in Europe and perhaps in the rest of the world.
Are the interests of consumers (ie investors) best served by large multinational exchanges that can reduce costs and increase efficiency by eliminating national barriers? Or would this be giving such exchanges a monopolistic position in their regions that would lead to inefficiency and rising costs? Will future competition between exchanges be truly global, with a large European exchange kept on its toes by challenges from equally large exchanges in the US and Asia? Or must competition be maintained within time zones and regions, so that Europe, for example, needs several exchanges competing with each other – even if they are then not large enough to compete internationally?
These are interesting questions, and though in the short term the key opinions may be those of the regulators, in the longer term the answers may be provided by market forces. One of the differences between today and five years ago is that the LSE – like so many of its peers – is now a publicly floated company that could be subject to a hostile takeover without the agreement of its board. At present this seems unlikely, but the possibility remains.
The other factor that the LSE's story illustrates is the increasing importance for a major exchange of operating in both the cash and derivatives markets. Both the rivals for the LSE have made a success of this dual operation, whilst the LSE itself is still essentially a cash market. With the apparent cooling of Deutsche Börse's interest, the most likely partner now seems to be Euronext with its vibrant LIFFE derivatives arm – and it surely doesn't need us to remind the LSE of the lost opportunity when it failed to merge with LIFFE on its own account. It remains to be seen whether the LSE has a plan for what to do if both bids fall through, and whether it is still in control of its own destiny.
Two further hot issues five years ago were the arrival in force of the electronic communication networks (ECNs) and the question of whether, in the face of technological changes, the traditional trading floor could survive – even at such an august institution as the New York Stock Exchange. The short answer is that, so far, it has – but the marauding ECNs are now inside the gates with the proposed merger of NYSE with Archipelago, as well as the takeover of Instinet and its INET ECN by Nasdaq. Another consequence of the Archipelago merger is the proposed IPO for the new NYSE Group, bringing the world's largest exchange by market capitalisation into the public arena and further exposing it to commercial pressures.
It is still too soon to predict the final end of the trading floor although as Peter Bennett discusses in his article for this edition of the Handbook (End of the road or new beginning for NYSE Specialists?), at least in the major centres the tide seems to be set firmly against it. The future of NYSE as an institution, however, which had started to be questioned in the face of scandals and investigations, now seems much more secure – especially if Archipelago can provide the injection of low-life vigour which the most blue blooded of families need from time to time. ('Tee' Williams explores the possibilities further in his article "I felt the earth move under my feet".)
The changes at NYSE and elsewhere show the way forward for all exchanges. Whether or not it follows the route of demutualising and listing, an exchange must be run as a business, not a club. Sentiment must be replaced by well thought through business plans that give customers – investors and traders – what they want. Technology must be used to enable buyers and sellers to come together in a regulatory environment that ensures honest dealing but doesn't get in the way of growth. Exchanges that refuse to accept change must recognise that they have no right to exist and at best will end up as museums living off state subsidies – until the subsidies are removed.
These principles now seem to be widely accepted in many areas, though the details of how they will work out in practice continue to be fascinatingly unpredictable. Looking forward over the next five years, an equally interesting question is how the exchanges industry will build on these principles to respond to the growing wealth and demand for capital in the rapidly developing regions of the Middle East, India and, especially, China.
In this Handbook Steffan Schubert (A new international stock exchange in a changing region) outlines the plans for the Dubai International Financial Exchange (DIFX) of which he is chief executive. Will it succeed in providing an attractive location for local investors who might previously have looked to Europe, the US or Asia? And can it attract issuers from across its time zone, especially India – or will the reorganised Indian exchanges hold on to their own market? China is potentially an even bigger prize, as Paul Chow of HKEx explains (Hong Kong as a capital formation centre), and while Hong Kong is well placed to respond it is likely to face stiff opposition from Singapore and elsewhere in Asia, as well as the US and Europe.
Even with the increasing pace of change it may take more than another five years to resolve these issues. But the road to their resolution is sure to be an interesting one – and one that the Handbook will continue to monitor and record.
