Macroscope | Why stock exchanges should be in public hands

If you work for a stock exchange, own shares in one, or operate through one in your daily business, or are below the age of consent, look away and move on – now.

The original function of a stock exchange was to permit the orderly and secure transfer of securities between individuals. One of their key roles is the discovery of the right price through the calling of bids and offers for the securities on their lists. The role remains the same today even if the calls have subsided to the hum of a cooling fan.

Stock exchanges are now huge businesses with the top five totalling over US$130 billion in market capitalisation – yes, they are indeed listed themselves. Because of the fees generated through trading, exchanges have become hugely profitable companies, especially when the Flash Boys’ high-speed computer trading has exploded turnover.

Until now. As profits have soared, the numbers of stock exchanges (and dark pools, the private equivalent run by big bank traders) have mushroomed. There are now 18 stock exchanges in the US alone. Trading values on the London Stock Exchange (LSE) have fallen in recent years despite rising volumes. The LSE’s open exchange market share in FTSE 100 stocks is now 59 per cent, against around 24 per cent for Bats Europe, which only started in 2008.

Old dogs are learning new tricks. The 320-year-old LSE has just commenced a two-minute “intraday auction process” in which orders are entered but not automatically executed. Bargains are briefly matched in the dark in a compromise between liquidity and transparency. The stock exchange hopes that this will compete against the dark pools, where large transactions can take place quietly but at the expense of immediate transparency.

The announcement last week of a proposed merger between Deutsche Bourse and the London Stock Exchange highlights the battle. Their first attempt by the Germans to buy the venerable LSE was in 2000, when a bid for US$1.1 billion was foiled. They returned in 2004 with a rejected bid of US$1.8 billion, but their stalking was finally rewarded last week for a US$14.5 billion cheque. Not a bad return; and rival predators like Intercontinental Exchange (owner of the NYSE), and the largest, the CME Group are still circling.