Top Story of 2006: For Profit Securities Exchanges

The top story of 2006 for the securities markets will be the impact of the new for profit securities exchanges.  The New York Stock Exchange will soon go pubic in its merger with Archipelago, the Chicago Board of Trade and the Chicago Mercantile Exchange have gone public, and the Nasdaq is also publicly traded.  The SEC has focused on the SRO functions of the markets and requested that the SRO functions be separated from the for-profit companies.  The details are under negotiation.  This is small potatoes however.  The real impact will be in how the exchanges are run (will the squeeze fees out of traders because they have market pricing power) and whether the exchanges will consolidate.  The Charmian of the NYSE has continually noted that the primarily advantage of a for profit company is that it can use its stock as consideration for purchasing other markets.  The NYSE will be on an acquisition binge.  Both developments, pricing power and consolidations, will sorely test the economic market principles of the SEC.  I hope the SEC will rely on tried and true antitrust doctrine to guide it through the thicket, something it has not done in the past when it has relied instead on the abstract notion of trading markets as regulated quasi-public utilities.  Trading markets are not inherently natural monopolies (unless government rules make them so) and should not be regulated as such.   The SEC approach to for profit exchanges will be the story of 2006