Stock Exchange M&A, fdi & Demutualization: industrial organization changes to the better or to the worse? Marie-Therese Marek / Peter Haiss




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8th Global Conference on Business & Economics ISBN : 978-0-9742114-5-9


Stock Exchange M&A, FDI & Demutualization: industrial organization changes to the better or to the worse?

Marie-Therese Marek / Peter Haiss1



Paper for presentation at the 8th Global Conference on Business and Economics,

Florence, Italy

October 18-19, 2008

Abstract


Stock exchanges turned from mutual & public ownership to private, shareholder-value driven ownership; grew in size, reach, breadth of product portfolio and concentration; formed a cobweb-like network, acquired each other and attracted foreign direct investment – just like any other company. External threats from substitute market mechanisms are about to grow.. What are the implications of this structural change within the European context? Applying the structure-conduct-performance paradigm to review the literature, we argue that there are both widely applauded positive outcomes as well as less often discussed possibly negative implications. Questions arising are whether a stock exchange could go bankrupt after demutualizing and who would step in to safe it as the national influence decreases in the consolidation process. Does the too-big-to-fail-rule so far mainly discussed for the banking sector also apply for exchanges? Could there be higher prices for clients due to reduced competition by ongoing consolidation or do technological threats make traditional exchanges disappear? Will Western stock exchanges be able to keep pace with Asian and Arabic ones and does MiFID trigger extinction of financial exchanges? We discuss which exchanges will survive the consolidation in the European stock exchange industry, how this consolidation will take place in Europe and what effect MiFID has on the European stock exchanges. We conclude that the whole financial system is confronted with new triggers evolving from the stock exchange industry.
Key Words: financial market architecture, exchange demutualization, financial risk

JEL codes: D4, G24, L10, L51, N20

Marie-Therese Marek

Peter R. Haiss

Graduate student, EuropaInstitut, University of Economics and Business Administration, Vienna, Austria

Lecturer, EuropaInstitut, University of Economics and Business Administration, Vienna, Austria

Althanstrasse 39-45/2/3

Althanstrasse 39-45/2/3

A-1090 Wien, Austria

A-1090 Wien, Austria

phone ++ 43(0)650 920 53 21

phone: ++43 (0)664 812 29 90

fax ++43(0)1 313 36- 758

fax ++43(0)1 313 36- 758

mt.marek@gmail.com

peter.haiss@wu-wien.ac.at



  1. INTRODUCTION

Thinking of stock exchanges the old image of bustling brokers fighting at the traditional trading floor, waving with white peaces of paper and taking busy on the phones is not really representing reality anymore. A lot has changed in the environment of stock exchanges. Globalization tendencies led to less home-biased investors as well as issuers of stocks. Companies decide to be listed at stock exchanges abroad as well as in their home country and investors want to further diversify their portfolio by also including shares from foreign enterprises. Consequently competition increased between national exchanges for order-flow and listings. Additionally, deregulation measures for financial markets resulted in lower entry barriers. And advances in information technologies as well as telecommunication systems opened new ways for doing business, also for stock exchanges.



Nowadays the core business of these trading platforms also has to face viable threats like remote membership, electronic order book trading, alternative trading systems, and the internalization of order flow by financial intermediaries. Important to understand is that the changes in the world of stock exchanges have effects on all involved parties: customers, suppliers as well as the trading platforms themselves. Questions arising are whether a stock exchange could go bankrupt after demutualizing and who would step in to safe it as the national influence decreases in the consolidation process. Could there be higher prices for clients due to reduced competition by ongoing consolidation or do technological threats make traditional exchanges disappear? Will Western stock exchanges be able to keep pace with Asian and Arabic ones and does MiFID trigger extinction of financial exchanges?
As a consequence of this changing environment this paper will look at mergers and acquisitions, foreign direct investment and demutualization among stock exchanges. The geographic focus will lie mainly in the European area. It will be discussed which exchanges will survive the consolidation in the European stock exchange industry, how this consolidation will take place in Europe and what effect MiFID has on the European stock exchanges.

  1. METHODOLOGY AND DATA COLLECTION


Secondary data will be used mainly from journals and scientific research paper but also from newspaper and magazines, as the topic itself is touching on a continuously changing and very dynamic aspect of the industry of stock exchanges. Methods that will be used to describe the changes as well as future developments in the industry of stock exchanges will be the network externality theory (Economides, 1993), Porter’s Five Forces (1981), Chemmanur and Fulghieri’s theory on low-cost vs. high cost investors (2006) and their implications for competition among stock exchanges.
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