Electronic Exchanges (eBook)

Front cover 1
Half title page 2
Title page 4
Copyright page 5
Dedication 6
Table of contents 8
Acknowledgments 14
1 An Era of Creative Destruction 16
Introduction 16
Trading: Simple Concept, Complex Process 17
The Birth of Exchanges 18
Open Outcry Trading 20
The Clearing and Settlement Process 22
Technology and Its Impact on Financial Markets 25
The Decade that Changed the Financial World 27
The First Electronic Market 28
Electronic Communication Networks and U.S. Equity Markets 29
Technology Advances in the Financial Industry 30
Outsourcing 35
The Transformation of Exchanges: Basic Themes 36
Implications of the Transformation 39
Endnotes 40
Part One: The Four Basic Transformations 42
2 From Floor to Screen: The Electronic Pioneers 44
Introduction 44
OM: The First Successful Screen-Based Exchange 50
Melbourne Tries Screens12 52
SOFFEX: Unexpectedly Electronic 52
DTB: The Other Half of the World’s Biggest Exchange 53
SOFFEX + DTB = Eurex 56
SAFEX: An Electronic Success from an Unexpected Corner of the World19 57
Asian Early Adopters 58
Conclusion 61
Endnotes 61
3 Floor to Screen: The Second Wave 64
Introduction 64
Late Arrivals Get Absorbed 65
Last to the Party 70
GLOBEX 72
Stock Exchanges Move to Screens 81
Conclusion 91
Endnotes 92
4 Floors to Screens: Nuts and Bolts 94
The Financial Trade Cycle 94
Electronic Trading Architecture 96
Side-by-Side and Hybrid Systems 102
The CBOE’s Hybrid System6 102
New Players Solidifying the Single-Screen Concept 105
Endnotes 105
5 From Private Club to Public Company 108
Introduction 108
The Member-Owned Exchange: The Good, the Bad, and the Ugly 108
The Last Step: The IPO 134
Conclusion 135
Endnotes 135
6 From National to Global Competition 140
Securities vs. Derivatives Exchanges: Fees and Revenues 145
Local to Regional Competition 146
Competition and Clearing 147
Competition in Options 150
Global Competition: The Past 153
The New Global Competition—Kill the Competitor 159
Conclusion 167
Endnotes 167
7 Smaller to Larger: Through Organic Growth and M& A
Organic Growth: New Contracts 170
Organic Growth: New Users 175
Growth via Mergers and Acquisitions 176
The New Era of Exchange M& A
The Future 192
Endnotes 193
Part Two: Implications of the Four Basic Transformations 196
8 A New Wave of Product Innovation 198
Innovation Acceleration in Futures Products 200
The Old World: Launching New Products on Trading Floors 201
The New World: Launching New Products on Electronic Exchanges 204
Some Things Haven’t Changed 207
Regulatory Change Drives Product Innovation 208
The Rest of the World 212
A Note on Innovations in Equities 215
Conclusion 217
Endnotes 218
9 Building Modular Exchanges via Partnerships and Outsourcing 220
Modular Exchange: Building Blocks 221
CBOT: Cautious Migration by Outsourcing Technology 223
Partnership with Eurex: First Alliance 224
Partnership with LIFFE 225
The Final Move 227
The Rise and Fall of Eurex Us: Outsourcing Technology and Services 227
Battle in the Energy Markets 230
NYMEX: Outsourcing New Product Listing 232
Leasing Technology 232
Early Pioneers: Technology Providers 233
Collaboration: Blurring the Lines between Exchanges 233
Leasing Clearing Services 235
Collocation 236
CME and LNET 238
The Modern Modular Exchange 239
Endnotes 239
10 Regulators: Leadership and Reaction 242
Introduction 243
The Electronic Driver and Overall Regulatory Design 245
Screen-Based Trading and the Concept of Regulation by Principle 246
Regulation and the Evolving Architecture of Markets 249
Private Club to Public Company 254
Ownership and Governance of For-Profit, Demutualized Markets 255
Globalization and the Accelerating Effect of Electronic Technology 260
Global Competition and Mergers and Acquisitions48 264
The Attraction of the Federal Model 264
Implications of Market Conglomerates for Further Regulatory Integration 265
National Interests 266
A Word about Regulatory Structure and Philosophy 267
Conclusion 269
Endnotes 269
11 Electronic Exchanges and Trading: Benefits 276
Globalization: Bringing the World Closer Together 277
Surge in Volume 280
Volume Growth around the World 282
Innovative Products Increasing Growth 285
Data, Data, and More Data 285
Risk Management 290
Competition 291
Automated Trading: Replacing Humans 295
Conclusion 299
Endnotes 300
12 Electronic Exchanges and Trading: Challenges 302
Dependency on Each Other 303
Technology Glitches 303
The Impact of Real-Time Data Availability 309
Inefficiency: Out-Trades in the Electronic Trading World 313
Endnotes 317
13 The Future of Financial Markets 320
Exchange Consolidation 320
In Response to Exchange Consolidation 322
Transparency and Speed 323
Partnership and Alliances 325
Clearing: Next Transformation 326
Global Financial Market for the Next Century 327
Common Platforms 328
Looking Ahead 329
Endnotes 330
Appendix A Abbreviations Used 332
Appendix B Technology Terminology 336
Appendix C Markets Glossary 338
Index 342