Exchanges (Finally) Go Global

It's unfortunate that the WSJ chose to run this fact-packed, big-picture story (subscription required) on the Saturday of Memorial Day weekend. Being the strategy geeks that we are however, we were all over it. The story charts the recent sea-change from human-driven, city-centric, product-specific, cooperatively owned stock exchanges to global electronic powerhouses trading in a wide range of securities and derivatives.

[U.S.] exchanges find themselves motivated by a new phenomenon: Big overseas companies no longer see the U.S. as a place where they must list their shares to raise capital. Tougher U.S. regulation of companies and the ease with which capital can flow around the world have made it attractive for companies to list closer to home. Next week, the Bank of China is preparing a nearly $10 billion offering that will take place on the Hong Kong Stock Exchange... In 2000, nine of every 10 dollars raised by non-U.S. companies outside their domestic markets was through U.S. exchanges... By last year, only one in 10 such dollars was raised in New York. [emphasis added]

As the WSJ notes, that's a truly radical change. Some of it is no doubt driven by exchange rates, but only some. Another major factor has been increased regulatory oversight in the U.S., (e.g., Sarbanes-Oxley), providing a sobering lesson in the unintended consequences of well-meaning legislation in a fluid, free-market global economy.

Massive, permanent structural shifts like this are what we refer to when we talk about "discontinuous change" and the need for creative scenario thinking in order to survive it. Linear forecasting and trend-spotting does little good. One day the world looks much like it always has and business-as-usual works just fine... and then one day it doesn't. Credit the NYSE's post-Grasso leadership with seeing and responding to these changes as best they can.

In early 2004, when John Thain arrived to take the helm, he quickly discovered that the NYSE had serious competitive issues. Specializing in stocks, it was less electronic than its peers. Visits to Chicago and Europe showed how the New York exchange had fallen behind innovative rivals such as the CME, Euronext and Deutsche Börse. Mr. Thain invited one NYSE staffer to his office a few months after he arrived and told him that the exchange had to go public, build a derivatives business and go overseas... [emphasis added]

Better late than never. The other thing they've been needing to do, which the article also notes, has been to marginalize and ultimately eliminate a byzantine human-dependent floor-trading system that by preserving antiquated pre-computer trading methods only lines the pockets of seat-holders and specialists. Other Mapping Strategy posts on NYSE doings can be found here, here, here, here, here, and especially here ("Competition and Terrorism in the Securities Industry").