Sunday 2011-08-14

Electronic Exchanges by Michael Gorham and Nidhi Singh

A quick history of the new electronic securities exchanges.

the NYSE earned a larger market share than the Philadelphia Stock Exchange (the first stock exchange in the United States) because it adopted the telegraph, which allowed it to expand by receiving orders from customers not physically located on the trading floor,
-- An Era of Creative Destruction
One of the keys of the success of the National Stock Exchange of India is that it never went through a period of being owned by its members. Because it was stockholder owned, it was nimble. Because it was electronic, it was quick and transparent. Consequently, it ate the competition's lunch.
-- An Era of Creative Destruction
Four and a half years after the abortive launch of the INTEX exchange (1984 + 4.5), the parent, INTEX Holdings, joined with Telerate, a supplier of financial data, to create an electronic trading system for the Londin International Financial Futures Exchange (LIFFE). This screen-based system was called APT (for Automated Pit Trading) and became an after-hours electronic system, similar to GLOBEX at the CME, Project A at the CBOT, and Access at NYMEX.
-- From Floor to Screen
Securities exchanges receive listing fees from public companies that list with them. They do not receive listing fees from companies in which they allow trading but do not formally list. They also do not receive listing fees for products they create that are based on indexes published by others. On the contrary, the exchanges must pay for the rights to use these indexes. AMEX, now part of NYSE Euronext, for example, must pay fees to Standard and Poor's for the very popular ETF, Spider (SPDR), listed there.
-- From National to Global Competition
In 2005, it (the International Securities Exchange) listed options on two of the most popular exchange-traded funds, SPDRs (based on the S&P 500) and DIAMONDS (based on the DJIA), without obtaining a license from the owners of thesse two indexes, <>McGraw-Hill and Dow Jones, respectively. The two indexing companies sued the ISE, but the ISE actually won the lawsuit.
-- From National to Global Competition
Like any favor-seeking sugar grower or steelmaker, the Chicago boys rushed to Washington to sling as much mud as possible at Eurex. Buttonholing such powerful home state pols as House Speaker J Dennis Hastert, they got a hearing on Nov 6 [2003] before the influential House Agriculture Committee, where they warned that Eurex could threaten everything from open markets to US national interests.
-- Business Week, From National to Global Competition
Top 20 Global Futures and Options Contracts, 2007
KRXKOSPI 200 Options2.642 G
CMEEurodollars641 M
CMEE-mini S&P 500415 M
CME10-year Treasury349 M
EurexEuro-Bund338 M

Product innovation over the 52-year period (1955 - 2007) had been sufficiently strong that not one single contract that was in the top 20 list in 1955 was still in the top 20 list in 2007. And none of the top 20 contracts of 2007 even existed in 1955.

-- Smaller to Larger
The CBOT went so far during that campaign as to lease from the city of Chicago the lampposts in front of the CME and hung banners touting the CBOT's new product.
-- Smaller to Larger
in the Commodity Futures Modernization Act of 2000, there was a provision that said exchanges need only to certify that listed contracts complied with all the regulations of the CFTC and all the provisions of the Commodity Exchange Act.
-- A New Wave of Product Innovation