Faculty Findings


Financial Exchanges In Transition
Mergers and IPOs Sweep the Floors at Home and Abroad

By Steve Friess

In the beginning, those with all the money created the New York Stock Exchange, the London Stock Exchange and others of its ilk, and they saw that it was good. Buyers and sellers crammed floors in the world’s great cities to find one another amid great theatrics and commotion, the value of corporations rising and falling in a corresponding manner. Not much changed for centuries, even as millions of new investors and thousands of new companies joined the fray.

In the past decade, though, egged on by computerized trading and international market pressures, the world’s exchanges have been enveloped in a rapid succession of the sort of mergers and IPOs that typically involve companies on these markets. How and when the dust will settle is anybody’s guess, but there’s little question that these deals are sparking stunning transformations in how business is done that will leave the markets of the future looking little like what came before.

The burning debate amid all these changes, which have reduced the number of exchanges and led those that exist to offer more diverse trading products, is whether the trading floor is slouching toward obsolescence. Notre Dame Finance Professor Robert Battalio, who studies the equities markets, doesn’t think so.

“I don’t believe the floor trader will disappear because the big institutional investors and those wanting to trade large blocks of equities rely on floor traders to keep the price from becoming too volatile as it would if someone decided to sell 1 million shares electronically,” said Battalio. In a recent paper accepted for publication in the Journal of Finance, he found that interpersonal trading yields better prices than all-electronic trading. “The electronic markets have yet to figure out how to keep those big purchases or sales from tilting the price of the stock too dramatically,” Battalio says.

Still, big changes are afoot. The Chicago Mercantile Exchange became the first U.S. market to go public in 2002, a move made to raise capital to modernize its trading mechanisms and allow for faster, more electronic transactions. Naysayers questioned the move, but the CME’s IPO price was $35 and now hovers around $300 a share. The act was partly a response to a potential European invasion of its U.S. stronghold, the derivatives market, with the advent of the no-pits, all-electronic Eurex US. Now the Chicago Board of Trade, long a rival of the CME, is planning a $260 million IPO of its own and looking for ways to work with the CME to fend off their common international competitor such as participating in the Common Clearing Link, an electronic system started in 2004 to hasten and cheapen the process of clearing trades on both markets.

Meanwhile, this spring also brought plans by the NYSE to go public and buy Archipelago Holdings Inc., a Chicago-based electronic stock and derivatives exchange, and the Nasdaq to buy Instinet for $1.8 billion. NYSE, the world’s largest equities market, trumpeted the move as a means of being able to offer more products—namely smaller-issue stocks and derivatives.

European markets are consolidating and diversifying, too. Exchanges in Amsterdam, Brussels and Paris merged in 2000 to become Euronext, then bought the Portuguese exchange BVLP and the British options market LIFFE in 2002. Meanwhile, the Deutsche Borse failed earlier this year to buy the London Stock Exchange, but officials at Deutsche Borse and at Euronext continue to look at ways to acquire it.

All this has some of Battalio’s colleagues disagreeing and predicting that the days of floor trading are numbered.

“The physical trading floors are dying out in terms of importance,” explained Michael Hemler, professor of finance, who studies the derivatives markets. “In some respects, these [mergers and IPOs] make the point that you don’t need the physical entities anymore.”

Steve Friess is a freelance writer who has written for Newsweek, The New York Times, The Wall Street Journal, Time, U.S. News & World Report, and The Los Angeles Times among others. He lives in Las Vegas, Nevada.



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