Demutualization and Public Offerings of Financial Exchanges

The recent merger of the New York Stock Exchange with Archipelago, a publicly listed electronic exchange, can be viewed as the final phase of a wave of organizational transformation that has swept across most of the world's major financial exchanges in the last ten years. Until the early 1990s, almost all stock and derivatives exchanges were organized as non-profit, mutual organizations owned by their members. But starting with the demutualization of the Stockholm Stock Exchange in 1993, the number of stock exchanges that have adopted a for-profit, publicly listed organizational form has grown steadily. At the same time, the largest derivative exchanges such as the Chicago Mercantile Exchange, the London International Financial Futures and Options Exchange, the Chicago Board of Trade, and Eurex are either already publicly listed or are part of publicly listed parent companies. In this article, after discussing the forces that are driving such change, the authors offer some early evidence on the profitability and stock market performance of listed exchanges. As the authors note, deregulation together with new developments in information technology have caused latent conflicts of interest within the mutual form of organization to become debilitating ones. And, as if to confirm the superiority of the new organizational form, the authors report that conversions to for-profit status and public ownership have led to significant increases in operating performance and share values. But, as the authors also note, these results are preliminary, and the demutualization and listing of exchanges creates a new challenge for exchanges as self-regulating institutions: managing the conflicts that may arise between the owners and those who transact on the exchange. The authors expect the next wave of transformation to produce both geographical consolidation as well as mergers/acquisitions across product lines (e.g. merger of leading equities and derivatives exchanges). In equities trading, given that North America is already dominated by the NYSE and Nasdaq, the most interesting arena will continue to be Europe, where one or two large exchanges are likely to emerge. The emergence of such megaexchanges, with scale comparable to that of U.S. exchanges, could have a significant impact on the corporate capital-raising process and cost of capital.