Stock exchanges are not like other businesses. The performance of national stock exchanges is often taken as a proxy for the health of a nation's economy, or at least investor enthusiasm for the country's prospects. National exchanges also play an under-appreciated policy role in deciding the listing and compliance standards for companies that wish to go public. On top of all that, there is a nebulous but real sense that national pride is often somehow tied to stock exchanges.
With that in mind, recent moves in the stock exchange sector have garnered quite a bit of attention. The Deutsche Borse wishes to merge with NYSE-Euronext (NYSE:NYX) in a transaction that will have NYSE shareholders holding 40% of the combined company and ownership of the first (to say nothing of arguably most famous) U.S. exchange moving into foreign hands. At the same time, the London Stock Exchange (or rather, its partner London Stock Exchange Group) has reached an agreement to acquire TMX Group (owner of the Toronto Stock Exchange) in a $3.2 billion deal.
As these deals seem certain to shake up the structure of several of the world's largest exchanges, it is a good opportunity to examine the ownership structure of several other major exchanges.
- Stock exchanges were originally organized as self-regulatory organizations owned and operated by their member traders, brokers, and market makers.
- More recently, exchanges have bought out their members and offered shares to the public instead via IPO.
- Today, most major exchanges are publicly traded companies, including NYSE Euronext and the Chicago Mercantile Exchange.
NYSE Euronext is far and away the largest exchange in terms of both exchange market capitalization and exchange traded value. Once owned entirely by its members on the floor, the NYSE went public in 2006 after acquiring Archipelago and acquiring Euronext in 2007. NYSE Euronext is now a public company, and Deutsche Borse has offered a merger proposal to the company.
Nasdaq OMX Group
The second largest public stock exchange by value, Nasdaq is also number two in terms of traded value. Nasdaq acquired seven Nordic and Baltic exchanges in 2008 (the OMX Group), after being rebuffed in its attempts to acquire the parent company of the London Stock Exchange.
Tokyo Stock Exchange
The third-largest stock exchange in the world is also the largest to not be publicly-traded. Though the Tokyo Stock Exchange is organized as a joint stock corporation, those shares are closely held by member firms like banks and brokerages. By contrast, the smaller Osaka Stock Exchange is publicly-traded, which perhaps befits long-held Japanese stereotypes about Osaka being more entrepreneurial and less hidebound than Tokyo.
London Stock Exchange
The world's fourth-largest exchange is owned by the London Stock Exchange Group, which is itself a publicly-traded company. As previously discussed, the parent companies of the LSE and Toronto Stock Exchange are merging in a deal that will make the combined entity the second-largest exchange group in terms of the market cap of listed companies.
Hong Kong Stock Exchange
Asia's third-largest exchange is a subsidiary of Hong Kong Exchanges and Clearing Ltd, a publicly-traded company that also owns the Hong Kong Futures Exchange and the Hong Kong Securities Clearing Company.
Shanghai Stock Exchange
This is the largest stock exchange in the world still owned and controlled by a government. The Shanghai exchange is operated as a non-profit entity by the China Securities Regulatory Commission and is arguably one of the most restrictive of the major exchanges in terms of listing and trading criteria.
Bombay Stock Exchange & National Stock Exchange of India
Along with the Tokyo Stock Exchange, these exchanges are throwbacks to how most exchanges used to organize themselves. While the NSE is demutualized, it is still largely owned by banks and insurance companies. Likewise, the BSE is about 40% owned by brokers, with other outside investors and domestic financial institutions owning the rest.
Other Important Exchanges
Of course, the trading and investment world is not just all about stocks. Derivatives are very lucrative to exchanges. In the United States, the Chicago Mercantile Exchange (CME) demutualized in 2000, went public, and eventually acquired the Chicago Board of Trade and NYMEX. CME Group is now a major player in the futures and derivatives world. On the options side, the Chicago Board Options Exchange (CBOE) also trades publicly as CBOE Holdings.
Eurex is a significant derivatives exchange owned by Deutsche Borse and SIX Swiss Exchange, while the London Metal Exchange is privately owned by its members through LME Holdings Ltd.
Last and not least, the Tokyo Commodity Exchange is structured in a fashion similar to the TSE and is owned principally by the banks, brokerage, and commodity trading firms that transact their business through it.
The Bottom Line
Running an exchange is a great business; it is effectively a monopoly. Those who own exchanges can require companies to pay listing fees, traders to pay for market access and investors to pay transaction fees. It is not altogether surprising, then, that there is so much activity in this space. In addition to the aforementioned major mergers, the Singapore Exchange is trying to acquire the Australian Stock Exchange, while Brazil's BM&F Bovespa (once state-owned and now publicly-traded) is looking to expand through acquisition as well.
While these transactions are interesting to a point, they do not generally help the individual investor. Unfortunately, trading stocks listed on foreign exchanges is still difficult (and expensive) for U.S. investors and none of these mergers will change that. Of course, it is up to the brokerages to offer these services and for investors to demand them. (Find out how the third-largest stock exchange in North America came to be. Check out History Of The Toronto Stock Exchange.)
In the meantime, it looks like there is an unmistakable trend in the market of stock markets towards greater global integration and fewer small independent operators.