Exchange Consolidations: Help or Hospice?
By Philip McBride Johnson.
Two blacksmiths who had competed to shoe the horses of the townspeople for 30 years watched as the first automobile drove down the main street. Recognizing that something big was occurring, they set aside their rivalry and met to discuss a response. When the blacksmiths emerged, they announced that they were merging their blacksmith business.
Might this be the future for the growing number of central financial markets that have announced interest in combining forces, often across national lines? In both the securities and derivatives worlds, new rivals have emerged to offer comparable services for similar transactions. This article raises the question whether exchange mergers can stem or reverse the gains made by those alternative execution methodologies. The article is based in part on my own experience working with markets for over 50 years, and incorporates a generous dose of conjecture. Unfortunately, if there are empirical data that resolve this matter definitively, I have been unable to locate them.
Markets for financial instruments and commodities have evolved over the centuries from the occasional get-together of nearby producers and buyers to nanosecond electronic execution facilities that operate from anywhere with lightning speed (“flash trades”), and often operate beyond the berm (read “dark pools”). The preeminence of even the mature central exchanges has been challenged by these new systems. Like the blacksmiths, one might wonder why, instead of merging with each other, they do not either acquire or create competitive mechanisms to confront these rivals head-on.