On Sept. 1, TabbFORUM kindly allowed me to post an opinion arguing against the proposed merger of the London Stock Exchange Group and Deutsche Boerse Group on the grounds of national interest (“Exchanges Are National: Time to Drop the Deutsche Boerse - LSE Merger”). The view posited was that exchanges are special for each jurisdiction, in terms of capital raising and secondary market multilateral pricing in the specific environment of local regulation, and the particular mix of national habit and financial actors. The difficulties or outright failures of past cross-border exchange tie-ups were noted; and, intentionally, the usual grounds for denial of such transactions on the basis of competition authority reviews were set aside.
My remarks were evidently going to appear antiquated. I gladly assumed the reputational risk in order to make a point about the “modern” way of doing things. TabbFORUM was the ideal way to see how some professionals might react, in particular in Europe, where the merger is to be completed, and also in any jurisdiction where there are multiple trade execution platforms coupled with today’s web of regulations and technology.
What exactly is an exchange these days? That was the opening question in the last opinion, and it remains unanswered.
I grant that they may no longer be “national treasures” in much of the world. As I suspected, the responses submitted to TabbFORUM were about what they no longer are. No one came forward to explain, “That was then; this now is.”
Forum readers no doubt accurately reflected the fact that the topics I raised were no longer the central, public focus of exchanges today. A reading of next month’s World Federation of Exchanges annual conference program confirms how the segment has moved on in its thinking and concerns. Absent from the posted agenda are the old-school themes that were emblematic of the special standards and economic position of a regulated exchange when they were, somehow, “national treasures,” as their public architecture presented them, and as society accepted them. Missing from that agenda are:
- market surveillance
- investor protection
- investor education
- issuer services
- listing requirements
- and even the word “investment”
These words, and the ideas behind them, are absent. Perhaps indirectly, they will in some manner be woven into the content of the panels.
So what is an exchange about now? Clearly, other subjects. But have other capital markets actors picked up what used to be the hallmark quality standards that brought a degree of confidence to the market, and defined and distinguished an entire segment of the financial system? I do not for a moment believe that these principles should have been discarded as if they were mere steps in technological development, some sort of echo of punch cards in the early days of computing before we got to where we are with laptops, phones, and watches. Principles of fairness always matter.
From the comments received to that earlier opinion, I think that today’s innovators should have the courage to consider and communicate on these possible implications:
- To the investing public, please know that with all these platforms in your market to encourage “competition” and lower explicit order execution costs, we are less certain about market-wide price formation and assuring surveillance to the extent we used to. If other actors get to the price, you may see flicker on a screen before you can get to it, well that is simply the way it is these days.
- To issuers, please know that in today’s marketplace we have less information on market interest to communicate to you. We no longer see much of the picture as to who is doing what with the securities you have issued and asked to be listed on the exchange. We regret giving you less benefit whilst collecting listing fees, but that is the way the business has evolved. Please accept that exchanges did not lead the charge to break up the central marketplace.
- To traders and market-makers, it certainly may be more difficult to prove that you are meeting your best-execution responsibilities. We wish you all the best in keeping up with the “electronification” of trading whilst trying to earn your living.
- To those who look to price discovery for the national macroeconomic information those asset valuations provide, please know that corporate disclosures have less meaning in these “modern” times. Market price reactions to them fade in the blur of high-speed, multi-platform execution. With exchange-traded funds and related futures and options, the marketplace has multiple, interlocking layers to consider. Indexing may have supplanted investment, but then none of us truly has the time to look at and assess the prospects of individual securities these days.
And yet, I wonder what happened along the way to these words: “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”Really? In this technical and regulatory environment? With this complexity and speed?
And how does one comply in the European Union with the new Market Abuse Regulation (“MAR”)? Under it, participants are supposed to report observed suspicious behaviour. How, in this pea-soup of movement, can that be discerned?
In the rush to the future, it seems that several fundamentals have been left behind in the striving to assure a social good, a national treasure in which the public could feel confident of fair treatment. No answers to the previous opinion piece posted on TabbFORUM postulated an alternative comprehensive definition or framework for the new exchange environment; sadly, the remarks were only about what no longer is.
The proposed London-Frankfurt merger served as the pretext for those reflections on the state of exchanges. If exchanges as “national treasures” is a notion relegated to history, as others write and as I fear, then LSEG and DBAG are now quite ordinary enterprises. Their futures matter a good deal less to the capital formation and pricing of each country’s financial system, and so the public policy question of their proposed merger is of lesser order.
The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.