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Changing Market Structures, Demutualization and the Future of Securities Trading Ruben Lee

Changing Market Structures, Demutualization and the Future of Securities Trading Ruben Lee Oxford Finance Group. Changing Market Structures & the Future of Trading. Overview 1) Threatening Factors 2) Self-Sufficiency 3) Linkages 4) Mergers and Takeovers 5) Demutualization

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Changing Market Structures, Demutualization and the Future of Securities Trading Ruben Lee

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  1. Changing Market Structures, Demutualization and the Future of Securities Trading Ruben Lee Oxford Finance Group

  2. Changing Market Structures & the Future of Trading • Overview 1) Threatening Factors 2) Self-Sufficiency 3) Linkages 4) Mergers and Takeovers 5) Demutualization 6) Conclusions

  3. Changing Market Structures & the Future of Trading 1) Threatening Factors

  4. Threatening Factors • Main Trends • Small Number of Liquid Stocks • International Listing & Trading of Domestic Stocks • Internalization • Regulatory Liberalization

  5. Threatening Factors • Reasons for Small Number of Liquid Stocks • Not Many Companies • Privatization Stalled • Concentration of Shareholdings • Foreign/Private Purchases of Best Companies

  6. Changing Market Structures & the Future of Trading 2) Self-Sufficiency

  7. Self-Sufficiency • Factors Supporting Domestic Stock Exchanges • Positive “Network Externality” with Liquidity • Competition Not Always Successful • Foreign Listing/Trading Complements Local Trading • Support of Domestic SMEs • Adaptability to Local Conditions • Declining IT Costs

  8. Self-Sufficiency • Current Major Revenue Sources • Membership • Listing • Trading • Clearing • Settlement • Provision of Company News • Provision of Quote and Price Data

  9. Self-Sufficiency • Threats to Revenue Sources • Membership - Demutualization • Listing – Decline in Value + Competition • Trading – Marginal Cost Pricing • Clearing – Expensive + Antitrust Scrutiny • Settlement – Antitrust Scrutiny • Provision of Company News – Competition • Provision of Quote and Price Data – Antitrust Scrutiny

  10. Changing Market Structures & the Future of Trading 3) Linkages

  11. Linkages • Potential Cost Savings • Economies of Scale • Greater Access to Markets • Greater Liquidity by Pooling Order Flow • Lowering User Costs – Technology, Standards

  12. Linkages • Potential Functions to be Provided • Marketing • Listing • Order Routing • Information Dissemination • Matching • Order Execution • Clearing • Settlement • Administration

  13. Linkages • Different Contractual Procedures Possible • Joint Venture • One Exchange Purchases from Other Exchange • Third-Party Provision

  14. Linkages • Reasons Why Almost All Have Failed • Over-Optimistic IT Assumptions – Cost & Speed • Exchange Governance Implications • Lack of Credibility of Contractual Commitments • Still Relatively Small

  15. Changing Market Structures & the Future of Trading 4) Mergers and Takeovers

  16. Mergers • Difficulties of Agreement & Implementation • Technological • Commercial • Legal • Regulatory • Political • Cultural

  17. Mergers & Takeovers • Advantages over Linkages • Distribution of Gains not likely to Lead to Conflict • Credibility of Implicit Contract Commitments • Contracts do not have to be Comprehensive

  18. Mergers & Takeovers • Lessons • Retention of National Identities Possible • Anticipated Technological Efficiencies take Time • Regulatory Efficiencies Very Difficult to Achieve

  19. Changing Market Structures & the Future of Trading 5) Demutualization

  20. Demutualization • Potential Benefits – May Allow Exchange to: • Modernize Technology • Create Currency for Alliances/Mergers • Escape Conflict between Members in Control • Unlock Members’ Equity • Allow Big Users some Control • Reward Users via Dividends • Obtain Capital • Facilitate Opening Access to Market • Improve Financial Decision-Making

  21. Demutualization • Unlock Member’s Equity • Different Types of Members • Small Members’ Votes Normally Determinative • Cash – Now!

  22. Demutualization • Reward Users with Equity • Many For-Profit Exchanges and ATS doing this • Effect: Re-Mutualization

  23. Demutualization • Improve Financial Decision-Making • Exchanges seek to Maximize Profits • Essentially Monopolies • Benefit of Mutual Structure

  24. Demutualization • General Comments • Benefits may not Materialize • Benefits may Conflict with Each Other • Costs as well as Benefits • Benefits may be Obtainable in Mutual Structure

  25. Changing Market Structures & the Future of Trading 6) Conclusions

  26. Changing Market Structures & the Future of Trading • Conclusions • Consider your Options • Undertake Realistic Cost-Benefit Analyses • Revenues: Assess Competition and Regulation • Linkages: Assess Current and Future Incentives • Linkages: Most Fail • Mergers: Problems of Agreement & Implementation • Demutualization: Costs as well as Benefits rubenlee.ofg@btinternet.com

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