Technology is changing every facet of financial markets. The little guy can go out and play with the big boys on the most-even terms he's ever had. The Internet doesn't care whether we're Merrill Lynch or Goldman Sachs, or whether we're Joe Wong living in Kowloon. We can have direct access to markets. It's the first time we have had this opportunity. Behind that is a radical reworking of staffing levels within financial institutions. We've got to rework the way the brokerage business is paid for because execution commission is collapsing by 80 per cent to 90 per cent. In the future, the business will not be so much about fund management and taking a percentage but more about fund mentoring. Fund mentoring is the notion that you may not be getting a percentage commission on everything your client does. Your client may be making a lot of his own decisions. But you'll know every position he has. A fund manager is like a player manager in soccer. He's on the pitch making sure everything goes the way he wants it to go. A fund mentor is much more like a team manager in an car race. You have to stand in the pit lane once the race starts, and there's nothing you can do but feed information to your driver as he's whizzing by. Strictly speaking, we don't need brokers for execution any more. Therefore, brokers are going to have to survive on their wits, and they're going to have to survive by adding value to the process. With exchanges - hey, presto - it's exactly the same story. Once you go electronic, dealers become more promiscuous in their dealing habits. They're not allied to any particular market. They're going to go where the deal flow is; they're going to go to where the high liquidity is; and they're going to go to the exchange which pays attention to their needs. And, frankly, exchanges are not good at the things they need to be good at. They're not good at doing things in a low-margin environment. They're not good at being accessible to their clients. So where do the exchanges go from here? First of all, they need to slim bureaucracy. They need to make themselves more efficient. Therefore, seeking for-profit status is a very good thing. They need to lose their clubbiness because in an environment where everybody's clamouring to have access to the markets directly, exchanges cannot be run solely for the benefit of a cabal of big brokers, small brokers, middle-sized brokers, institutional dealers or a mixture of those. How's the Stock Exchange of Hong Kong faring? Badly. They're making the right noises, but I do not believe there's any understanding of what they need to do. First of all, we've got what I would call the demutualisation-as-panacea argument. But if you're a bureaucratic, unresponsive and not particularly efficient market place, then demutualising isn't going to do you any good. If you're a dog of a company and you go for an initial public offering, you're still a dog. The only problem is you've now got greater transparency. It's a suicidal course. The difficulty the Hong Kong stock exchange has is that it's being run by a relatively small cabal of members who have undue influence compared with the amount of business they're likely to do in the future, let alone the amount of business they're doing now. They're reluctant to let fixed commissions fall by the wayside. They're reluctant to endorse reform. The concept is: we can demutualise to throw off the shackles of our existing shareholders. The problem is if you cannot hack it by reforming your membership, I don't think you're going to be able to hack it as a competitive exchange in a global environment. It's as simple as that. So we have the demutualisation-as-panacea argument. Secondly, we have the cross-asset-class-merger fallacy. Offering a platform of different assets within one exchange environment is a brilliant idea provided the merged organisations are synergistic. Marrying your cousin for the sake of it doesn't necessarily improve the gene pool, and that's exactly the situation Hong Kong has. Hong Kong is a free-wheeling, wheeler-dealing, exciting, capitalistic society. But the Hong Kong Futures Exchange has never lived up to its potential in Hong Kong. It's a domestic marketplace. It's never been international in its focus, no matter how it would like to delude itself. It's blown away by its competitors in the region and, to be honest, none of them are particularly hot. But let's examine exchange alliances. I come from Belfast originally. Exchange alliances are much like the Northern Ireland peace talks. Everybody gets into a room, and they all say they want one particular thing - which in the case of the Northern Ireland peace talks is peace, and in the case of exchange alliances is a good deal for all exchanges and better dealing for their members. The problem is that as soon as you sit down and talk, I turn around and say, 'Well, you're going to have to give up such and such in order for this deal to work'. And you say, 'That's no problem whatsoever'. And then the chairman turns to me and says, 'Well, of course, then you have got to give up X, Y and Z in order for this deal to work'. And I say, 'Whoa, I'm not giving that up'. That's the problem with exchange alliances. You have two enterprises each looking to have the best deal, and nobody likes giving anything away. The Nasdaq Stock Market is dipping its toes in the international waters. Their alliances around here are probably a way to another merger or an exchange of their own or something like that. They're doing deals with everybody, but there are not that many qualified candidates who turn out to be particularly exciting or palatable for the rest of the world. Hong Kong is distinctly palatable in terms of the ethos of what is Hong Kong. But the problem is that the exchanges are way behind the ball compared to where the seriously sophisticated players are at. We will go to a relatively limited number of centralised market places, whether they're exchanges per se or not is moot. We're going to get four or five large points of liquidity, and it's going to be based on a sector specialisation, an asset-class specialisation, something like that. With Nasdaq, it's already happened. Nasdaq controls the tech-stock market. A lot of people seem to think that electronic communication networks [new trading systems that match orders between investors using the same network] are some incredible solution to the stock exchange problem. The fact is that ECNs are a symptom of the stock exchange problem. And, therefore, it's quite possible that ECNs will be a transitory fad. ECNs are a great thing for facilitating a certain type of stock market trade. They are not a be-all-and-end-all solution. If they're going to become a more centralised market place, they need to have a centralised limit-order book. They don't have that at the moment, although some of them are talking about going to that. But at that point, they're going to become an exchange in their own right. Two or three of the big ones are going to become competing exchanges. The rest of them will probably wither and die. The ECN thing will probably turn out to be, as I say, a fad that will more or less die out during the next four or five years as we get on to providing solutions that are permanent rather than temporary. I've been on this book tour. I've been pretty much everywhere, and it's so funny going to meet people in stock exchanges around the world. They all pull out these fantastic figures about how good they are, and they all show you that they've got a less in-your-face regulatory environment or lower costs for listing or lower costs for execution. It's like, 'I'm sorry, but you've missed something here. Your competitor is not another exchange. It's not an ECN. It's somebody like eBay. They're going to be your serious competitor.' At least half these people go white and say, 'When did eBay say this?' The stock market of the future is going to be anywhere where people can join together to trade shares, and they'll do it from their living rooms. At the next level, the stock market is going to be more customer-orientated, probably relating directly to the public. That's where the business is going to seriously take off, and that's why everybody's suffering ECN myopia. All they can see are these ECNs coming straight towards them. But down either side are new competitors, and they're going to blow them away. PATRICK YOUNG claims to have traded on all the world's major derivatives markets and now trades independently, dividing his time between Europe and Asia. His on-line magazine, Applied Derivatives Trading, has been described by the chairman of the London International Financial Futures Exchange as being to 'futures freaks and derivatives dervishes what the naturist magazine Health & Efficiency was to post-war British schoolboys - a tantalizing glimpse of a promising future'. In his new book, Capital Market Revolution: The Future of Markets in an On-line World (Financial Times/Prentice Hall, 1999), the Belfast native and former motor-sport journalist coins the slogan: 'Liquidity! Accessibility! Transparency!' During a brief visit here, he applied his manifesto to Hong Kong's financial markets in a conversation with SARA FRENCH.