Sent: 15-02-2011 11:50:58
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The End of the National Stock Exchange
Since writing about the speed of technological change two weeks ago, Nokia has announced it will dump a mobile phone operating system that gave it a 30% global market share in favour of one of the world's least popular mobile operating systems as it struggles to work out its future role in an increasingly commoditized product offering.
The scramble among major stock exchanges to retain their relevance is also symptomatic of how technologically dependent industries are only as strong as their most recent innovation.
While stock exchanges came to signify national financial strength and prestige, they were always an appendage to the financial markets. They were originally mutual societies established by brokers to facilitate their trading. Brokers and investment banks eventually sold their stakes knowing they could ply their trades successfully without having to own them.
The mystique of the stock exchanges persists. The National Association of Securities Dealers in the USA felt compelled to establish their NASDAQ market site in New York to emphasize that it was a real market even though this physical presence was entirely redundant as its activities were conducted wholly electronically.
National stock exchanges have been passing into history. The New York Stock Exchange bought the owner of stock exchanges operating in France, Belgium and Portugal as well as the London International Financial Futures Exchange to form NYSE Euronext, partly prompted by a NASDAQ bid for London's stock exchange. Now, Deutsche Bourse, operator of the Frankfurt exchange, wants to buy NYSE Euronext. The London exchange is apparently courting Toronto and, of course, Singapore is eyeing off the ASX.
Today, the value of stock exchanges depends on how well they facilitate high volume trading. That means they need to be technology innovators. They need to find smart new ways of processing information.
They will not be judged simply on how well they generally perform this role. They will be judged on how well they react to occasionally extreme situations. Amidst a global financial catastrophe such as we experienced in 2008, for example, can they process a quantum leap in the volume of trades so as to safeguard the viability of the institution?
So, today's stock exchanges will be judged on how well they prepare for the unthinkable while technologically savvy users are seeking to push the bounds of what is possible.
The so-called "flash crash" in May 2010 when the Dow Jones plummeted 600 points in five minutes highlighted the importance of the major stock exchanges being able to cope with modern trading technologies that have encouraged the growth of little known new exchanges specializing in execution services for professional traders.
The largest brokerage firms are also seeking to internalize their trades to minimize the fees they pay to the exchanges
The floor of the New York exchange on Wall Street is no longer needed. Like the NASDAQ market site, it has been retained simply to reinforce the image of a physical market, assist in corporate branding and have somewhere for company executives to visit.
The main national stock exchanges do not have a monopoly on the technology which underpins their primary function. As they battle to avoid extinction, they have chosen to bulk up and, by getting bigger, amortize the costs of new technology over a far larger trading base.
This is not the argument you will hear them put. More frequently, they will talk about maintaining national prestige, capital raising and benefits to listed companies.
The London and Toronto exchanges are arguing that, together, they can account for a large share of the trade in mining and natural resource stocks. Focusing on a relatively quick growing part of the market might add to the earnings of the exchange operators while the cycle is in their favour but it would be a mistake to conclude that this helps companies.
Companies will benefit significantly when shares are completely fungible and registries no longer distinguish between a share in the same company traded in London and one traded in Sydney, for example. This has more to do with national securities legislation and the relative inefficiency of share registries than the role of the stock exchanges.
In short, capital markets may no longer need the high profile national exchanges when smaller, more technologically innovative companies can facilitate high volumes of trading. Retail investors, too, are increasingly comfortable with online trading access and less concerned with where their trade might be ultimately settled. Smaller listed companies are probably the group most enamoured by the symbolism of the national bourse as they seek to raise their business profiles.
The major stock exchanges may eventually become as important to the capital markets as the scoreboard at Wimbledon. Everyone looks at the scoreboard at some stage but there is fundamentally more to the Wimbledon tennis experience than the scoreboard and there are alternative ways of keeping track of the progress of a match.
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