November 21, 2005
Securities Exchanges as Publicly-Traded Corporations
Three securities exchanges have gone public this year: The Chicago Board of Trade (CBOE), the International Securities Exchange (ISE), and recently the Intercontinential Exchange (ICE). The Chicago Mercantile Exchange (Merc) went public in 2002. The exchanges all deal in financial derivatives: CBOE trades treasury treasury futures, the ISE features stock options, the ICE trades energy contracts, and the Merc features Eurodollar futures. Each has been a success story. The Merc went public at $35 a share and is now trading at over $375. The ISE, is up two-thirds since a debut in March of this year. ICE opened at $26 a share and climbed to $40 on its opening day. These are stunning numbers and suggest that when our stock exchanges go public we will see some remarkable valuation numbers. Are the prices a bubble or real? I believe that they are real with market insiders reflecting two things: First, exchanges will be run very differently once they de-mutualize (not longer a member run old boy's club, they will have to show profits) and, second, the exchanges have a very privileged regulatory position, giving them pricing power in their markets (profits are available to be made by the new managers). When the NYSE goes public in its reverse merger with Archipelago, we are going to see some real fireworks.
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Have you thought through the favorable "regulatory" structure of Demutualization? What are the potential conflicts of interest that arise from de-mutualization given the self-regulatory structure combined with near monopoly pricing power!? This is a nightmare waiting to happen...
Posted by: Thomas Floyd | Nov 22, 2005 8:15:20 AM
Does anyone believe that all of these exchanges will be able to resist the obvious gravitational pull of the internet? Am I being niave in thinking that one day all trading will take place online, on internet based platforms? I don't believe there will be any other way to trade in the future. What are your thoughts, pro/con?
Posted by: Harold Pelham | Nov 25, 2005 8:30:31 AM
The exchange's regulatory function would be spun out as a separate, non-profit, private entity with its own management and board. (taken from Forbes)
Posted by: Justin | Nov 28, 2005 11:27:13 AM