The dominant question facing the board and management of many exchanges during 2000 and 2001 has been: do we stay or do we go? Do we remain as a mutual organisation, owned by our members and run for their benefit? Or do we demutualise, separating trading rights from ownership, turning ourselves into a conventional for-profit company and, ultimately, making our shares freely tradeable by listing on our own exchange or elsewhere?
There are powerful arguments on both sides. As yet, there is no clear consensus about the correct approach to take, and little track record on which the effect of demutualising and listing can be judged. Nevertheless, leading European exchanges such as Deutsche Börse, the London Stock Exchange and Euronext, the alliance of the Paris, Amsterdam and Brussels exchanges, have opted for this route. Even the mighty New York Stock Exchange has been authorised by its board to move towards an initial public offering.
But despite the siren calls from demutualisers of "increased flexibility", "commercial freedom" and - more sotto voce - "realising value", a change of structure is no guarantee of success. As Martin Scullion argues forcibly in his article in this edition of the Handbook (Demutualisation: The challenges facing global exchanges), implementing a demutualisation program is not trivial. It represents a wholesale corporate cultural transformation - changing every dimension of an exchange. In particular, it means addressing the intractable issue of mindset - altering the perspective of everyone in the organisation from chairman to receptionist to ensure that entrepreneurial flare is developed alongside effective management.
Despite these difficulties, the carrot of increased opportunities is combining with the sticks of increased competition and technological change to lead more and more exchanges along the demutualisation road. In interviews conducted by BTA Consulting, 79% of mutual exchanges said that they planned to demutualise within the next two years. A survey taken at the October 2000 FIBV conference found that 78% of exchanges either had approval to demutualise or were actively considering it. One might guess that the actual numbers completing the process - and in particular, succeeding in moving beyond a simple change of legal status - would be rather lower than these figures suggest. But nevertheless, it is clear that we are witnessing the birth of a significant new market sector.
The really interesting question is how these newly commercial exchange organisations, driven by shareholder demands and market pressures, will evolve. The most successful are likely to rethink their business strategy - to ask themselves the fundamental question: "What business are we in?" - leading them to diversify rapidly into other areas. Many will seek to bring cash and derivatives trading under one umbrella via mergers or even - as the logic of freely tradeable shareholdings kicks in - through hostile takeovers.
Others will seek to develop vertically by providing depository services. Some will maximise the value of their information through providing index services, on their own or in conjunction with established players (see the new section on Index Providers and the Index of Indices, included in this edition of the Handbook for the first time). Still others will exploit the infrastructure, information technology skills and even the intangible reputation developed during decades or even centuries of trading. John Crackett's article (Electronic trading) outlines some of the, perhaps unexpected, directions that commercially-minded exchanges might take.
Above all, we can expect to see exchanges reaching out to a far wider audience and embracing retail as well as professional investors - directly, rather than relying on information vendors. As with many of the competitive pressures that are forcing exchanges to reassess their position, it is the Internet and the explosion of communication possibilities that it provides that is accelerating the pace of change.
And for these investors, the new exchanges sector will surely become an area that cannot be ignored. The valuation of shares in businesses with a long track record but operating in a rapidly changing environment will be an interesting challenge to the markets. What will be the appropriate benchmarks by which they should be judged? And how will it be possible to spot the winners, the losers and, crucially, those with potential?
To assist in answering these questions, Mondo Visione, the publisher of this Handbook, has teamed up with FTSE to produce an index which will monitor the progress of the new exchanges sector. The FTSE/MV Exchanges Index will include leading listed exchanges, as well as alternative trading venues such as Instinet and other ECNs which have floated their shares. It will be launched during the second half of 2001.
