Exchange Mergers and Electronic Trading

Abstract

Organized commodities and securities exchanges are national exchanges where securities, options, and futures contracts are traded by exchange members for their own accounts and for the accounts of their clients. A wave of mergers between organized exchanges has taken place during the last decade. These mergers result from synergistic effects, tax gains, reduced capital requirements, product diversification, geographical diversification, and advances in electronic trading technology. Technology advancements facilitate mergers by reducing transaction costs, increasing market liquidity, and enhancing transparency and competition. The objective of this article is twofold: 1) to review the recent merger trends and joint ventures among major exchanges around the world, and 2) to describe the associated innovations in electronic trading that incentivized exchange mergers.

John Thain took charge of the NYSE in 2003 and led it through several major technological and organizational changes. NASDAQ hastily followed suit in developing its increasingly global and multi-asset-class trading platform. Subsequently, the organized commodities exchanges in the United States started consolidating and modernizing. Thus, Wall Street and many overseas exchanges were driven into the electronic trading era, which set the stage for a series of breath-taking advances. By 2008 investors could select from a menu of alternative trading systems (ATSs) that offered different but competitive financial services. It is exciting to watch these competitors strive to surpass each other as the race to excel moves ahead relentlessly.