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World of Exchanges: Adapting to a New Environment

World of Exchanges: Adapting to a New Environment

ISBN: 978 1 84374 343 9

No. of Pages: 170

Author: Shahin Shojai (ed.)

Publisher: Euromoney Books

This innovative new title provides in-depth analysis of the major challenges facing stock exchanges, their implications for the future and the strategies to address them.

Publication Date: April 2007

Price: £175  

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Understand how recent changes in the regulatory environment have transformed the world of stock exchanges and left the once protected industry open to the most extreme forms of competition. Essential insight for traders, dealers, underwriters, investment bankers, security brokers and legal advisors involved in exchange activities.

Provides you with a detailed examination of:

- Current challenges and future implications for stock exchanges
- Cross-border mergers and alliances between stock exchanges
- Electronic trading
- Global derivative market competition
- Micro-exchanges
- Market integration in the post-trade industry
- U.S. securities regulation in a world of global stock exchanges
- MIFID and its effect on stock exchanges


'A group of the top banks are launching a new trading platform for financial derivatives. This will compete with the region's exchanges. European legislation - ie, MiFID - aims to spur competition in financial services by tearing down the structures that block it (Financial Times, 6/02/08).

To read about stock exchanges and the challenges they face, buy World of Exchanges.'

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Foreword: Andrew Hilton, Director, Centre for the Study of Financial Innovation

Part I: Transformation of the industry

Chapter 1 - Exchanges - current challenges and future implications
Shahin Shojai, Director of Strategic Research, Capco
Chapter 2 - Cross-border mergers and alliances between exchanges: a global perspective
Iftekhar Hasan, Professor of Finance and Director of the Center for Financial Technology
Cary L. Wellington, Lally School of Management and Technology of the Rensselaer Polytechnic Institute
Tina Hasenpusch, Ph.D.-elect, European Business School
Heiko Schmiedel, Policy Expert, Directorate General Payment Systems and Market Infrastructure, European Central Bank

Chapter 3 - Electronic trading: rival or replacement for traditional floor-based exchanges? 
Wayne H. Wagner - Senior Advisor, ITG Solutions Network, and Chairman, OM/NI, LLC. 

Chapter 4 - The outlook for global derivative market competition
Jens Nystedt, Chief US FX Strategist, Deutsche Bank

Chapter 5- Electronic markets heat up; micro-exchanges arrive
Eric Benhamou, Founders and Head of Quantitative Developments Pricing Partners
Michel Everaert, Chief Information Officer-E-commerce, GFI Group
Thomas Serval, President & CEO, Baracoda SA

Part II: Challenges confronting exchanges

Chapter 6 - Market integration in the post-trade industry: lessons from Europe
Daniela Russo, Deputy Director General, Directorate General Payment Systems and Market Infrastructure, European Central Bank
Simonetta Rosati, Senior Market Infrastructure Expert, Directorate General Payment Systems and Market infrastructure,  European Central Bank

Chapter 7 - U.S. securities regulation in a world of global exchanges
Reena Aggarwal, Deputy Dean and Professor of Finance, McDonough School of Business at Georgetown University
Allen Ferrell, Greenfield Professor of Securities Law, Harvard Law School
Jonathan Katz, former Secretary, U.S. Securities and Exchange Commission

Chapter 8 - MIFID and its effect on Exchanges
Simon Bennett, Managing Principal, Capco


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by Andrew Hilton, Director, CSFI (Centre for the Study of Financial Innovation)

This is an astonishing piece of work. Unless you are an epic masochist, it is not a book to read in one go. And it is certainly not light reading for a Caribbean beach holiday. But it is an extraordinarily successful attempt to bring together in one place authoritative articles on all the key issues that plague the exchange space today.

This is no mean feat. The exchange landscape is changing so fast today that there is a serious danger that what one writes this week will be out of date next week – and that is an obvious risk. But it is a risk worth taking since exchanges are, essentially, the plumbing of capitalism – the unglamorous back end that makes possible those Wall Street/City mega-bonuses and the romanticization of investment banking and fund management.

I do not know of any comparable effort to take stock of what is going on – certainly not one which brings together a genuinely stellar mix of regulators, practitioners, and academics as authors. Of course, there is a price. Although, the quality of the contributions is uniformly high the styles that writers have adopted vary wildly – from a breezy journalism to pretty heavy, footnote-laden, academic analysis. But that is a price well worth paying.


The structure of the book reflects a broad consensus as to the challenges that exchanges face. Paraphrasing slightly, I see six big challenges:

      -          First is a trend, both within individual markets and on a cross-border basis, for exchanges to consolidate. For most observers, this is the dominant trend de nos jours. The emergence of Euronext in Continental Europe set the trend: now we have the New York Stock Exchange’s bid for Euronext, and Nasdaq’s (more contentious) attempt to buy the London Stock Exchange. But it is not just Europe: there is also consolidation in the U.S. itself. The issues are what is driving this trend? And what are its implications likely to be?

      -          Second, an important sub-theme of this book is that there is really no agreement yet on whether consolidation of liquidity into bigger and bigger pools is an unequivocally good thing – or whether a better answer may not lie in using technology to link separate liquidity pools. Consolidation may be inevitable, in that demutualization of ownership puts shareholders in the driving seat – and what they want is to boost their share price. But the technological imperative offers what is essentially a network alternative. Advances in technology can make what the book calls micro-exchanges a viable alternative to mega-exchanges as we know them.

      -          Technology is really the third point covered in this book. Until astonishingly recently, exchanges were open outcry, often pits, and were based on person-to-person contact. Some still are – and this kind of trading still has its advocates, who believe that a degree of subjective judgment is still necessary if deeper, darker layers of hidden liquidity are to be tapped. That said, the tide is really running in the other direction. The relentless fall in the cost of technology and the (equally relentless) increase in what software can offer in the way of artificial intelligence means that the days of brightly colored jackets, loud-mouthed floor trading, and the buzz of open outcry are numbered. It is boring but true that an Indian software engineer can now build you an exchange-in-a-box that can do everything a conventional exchange can do at a tiny fraction of the price.

      -          The fourth theme that runs through the book is again one that stems from technology – particularly the falling cost of technology, which makes it easy and inexpensive to develop new markets, often in the derivatives area. Given that the cost of building an exchange is no longer a limiting factor, the constraint on what can be traded is simply a function of the market. From futures to options, to options on futures, to gas, to oil, to weather derivatives, to credit default swaps – the possibilities are endless. Many of these will obviously be developed and traded  under the umbrella of existing exchanges (not least because of their marketing skills and the value they add through information collection and dissemination), but the lowering of the cost barrier means new players can come – and go.

      -          The fifth big issue is the clearing and settlement space – the plumbing behind the plumbing, if you like. The post-trade infrastructure – particularly in Europe – is inefficient, expensive, and largely non-contestable. As we move away from vertical silos, contestability should increase, but commonsense suggests that those who have been making super-normal profits out of the opacity of the system will not give up quietly. Still, there are many initiatives in this space – including the banks’ own Project Boat, which holds open the prospect of building an alternative channel for trading information, thereby breaking the hold that exchanges and C&S systems have over data flows.

      -          Sixth – and, unfortunately, far from last – is the issue of regulation. And its ugly twin, compliance. There is no doubt that the regulatory burden has increased exponentially in recent years – not least because industry players are forced to respond to any regulatory initiative with a battery of lawyers. Obviously, the issue in the exchange area is not as bad as at the retail end of the market, but the cost of this regulation is far from negligible – which makes any effort at cross-border harmonization so important. But, as this book demonstrates, do not assume that rationality will always prevail. From the U.S. side, Sarbanes-Oxley demonstrates just how easy it is to drive business away; from Europe, the dreaded MiFID illustrates just how little Continental European regulators understand about the finer points of capitalism. And, in both cases, we are going to have to face a raft of unintended consequences – some fairly benign, but some not. From SarbOx, for instance, comes the strong probability of an attempt by the U.S. authorities to extend their extra-territorial jurisdiction. From MiFID comes Project Turquoise and a quite plausible threat to the entire structure of national stock exchanges as we know them.


A canter through such a complex subject is inevitably a caricature, and the value of this book is that it is not a caricature. It is a collection of considered contributions to one of the most complex issues of contemporary capitalism, and if it defies an easy summary, that is much to its credit. Exchanges make the capitalist whirligig go round, and the more we understand about them, the better.

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Author Biography

About the editor

Shahin Shojai is the Director of Strategic Research at Capco, Director of the Capco Institute, and the Editor of the Journal of Financial Transformation. In addition, Shahin is also a senior subject matter expert and a member of Capco's Private Client/Asset Management practice. Prior to joining the company, Shahin was President and CEO of WRA Group, a syndicated research company providing research and advisory to the treasurers and CFOs of Fortune 500 companies. Before that, Shahin was Director of the European Institute, a think-tank for CEOs of the 92 largest institutional asset management firms in Europe and North America. Previously, Shahin was a member of the world of academia, holding visiting or full professorial appointments at a number of academic institutions in Europe and North America, including London University, Boston University, Paris Graduate School of Management, Université Paris-Dauphine, Syracuse University, and the American University in London, where he was the Chairman of the finance faculty. Shahin holds a PhD in Finance & Economics from the University of Nottingham, and an MBA in Finance from City University Business School.

About the contributors

Iftekhar Hasan is currently the Cary L. Wellington Professor of Finance at the Lally School of Management and Technology of the Rensselaer Polytechnic Institute and the Director of the Center for Financial Technology. Dr Hasan’s expertise is in the area of corporate finance, financial institutions, and capital markets. He has held visiting faculty positions in several reputed European and American universities such as the University of Rome at Tor Vergata, Robert Schuman University at Strasbourg, Cheng Chi University at Taipei, and Stern School of Business in New York. Professor Hasan is also a Research Fellow at the Berkley Center of the Stern School of Business; a Scientific Advisor at the Central Bank of Finland; and a visiting scholar at the Federal Reserve Bank of Atlanta. He has been a consultant of the World Bank, United Nations, Italian Deposit Insurance Corporation, and several U.S. corporations. He has over 150 publications in print, including 9 books and edited volumes, 80 peer reviewed journal articles in reputed finance and economics journals and serves as an associate editor in a number of reputed journals. He has presented his research work in many professional meetings and institutions in 52 different countries.

Tina Hasenpusch is currently completing her PhD at the European Business School in Germany. Her research focus and expertise are in the fields of capital markets and securities market infrastructure. Her dissertation analyses the future development of the clearing industry. Before commencing her doctoral studies, Ms Hasenpusch worked for the CEO of Eurex derivatives exchange and clearing house. Her responsibilities included amongst others the preparation of presentations, speeches, and research material, as well as acting as interface between the Executive Board, operational departments, and subsidiaries. Prior to her career at Eurex, she graduated with a distinction from the European Business School in finance and management information systems. In addition, she studied business administration in Argentina and in the USA. Alongside her studies, Ms Hasenpusch gained substantial international work experience in the area of finance, marketing, and consultancy.

Heiko Schmiedel is a policy expert in the Directorate General Payment Systems and Market Infrastructure at the European Central Bank. He conducts economic research and policy analysis in the field of securities trading, clearing and settlement systems, as well as payment systems. Before he joined the ECB in 2003, he served as an economist at the Hamburg Institute of International Economics. He was visiting research scholar at the Research Department at Central Bank of Finland, the Dutch Central Bank, and Stern School of Business at the New York University. Dr Schmiedel received a PhD in international finance from the University of Hamburg. He has published articles in applied econometrics and finance including monographs, book chapters, academic journals and reviews, such as the Journal of Banking and Finance, International Review of Financial Analysis, and Journal of Financial Regulation and Compliance.

Wayne H Wagner consults on issues relating to securities trading and exchanges. He co-founded Plexus Group, a Los Angeles based firm that provided trading evaluation and advisory services to money managers, brokerage firms and pension plan sponsors. In 2006, Plexus Group became a part of ITG Solutions, Inc., for whom Mr Wagner consults as Senior Advisor. He is a frequent writer and speaker on many trading and investment subjects and author, co-author and editor of different titles. Wayne is founding partner of Wilshire Associates and served as Chief Investment Officer of Wilshire Asset Management and prior to that participated in the design of the first index funds at Wells Fargo Bank. He holds an MS in Statistics/Management Science from Stanford University and BBA in Management Science/Finance from University of Wisconsin.

Jens Nystedt joined Deutsche Bank in 2004. Since February 2006, Jens is the Chief US FX Strategist focusing in particular on G10, links with EM, and the commodity currencies (especially the CAD). He initially joined as DB's Chief Economist for EMEA and Head of Local Markets Strategy. Prior to DB, Jens worked for almost six years as an Economist at the International Monetary Fund (IMF) where he worked for the Research, Policy Development, and International Capital Markets Departments. Jens also participated in the IMF's efforts to resolve several sovereign debt restructurings and currency crises across emerging markets. Jens holds an MSc in International Finance from the Stockholm School of Economics, Sweden, and a PhD in International Economics and Finance from the same business school. His thesis topic focused on competition issues in international financial markets.

Eric Benhamou is one of the founders and head of all the quantitative developments at Pricing Partners. His team develops models and pricers for all derivatives including fixed income, credit, equity, foreign exchange, inflation and hybrids products. He has a senior experience of developing pricing and risk management tools and worked previously at Goldman Sachs and lately Ixis CIB. A former alumnus of the École Polytechnique and E.N.S.A.E., he holds a PhD from the London School of Economics and a DEA in financial mathematics. He is a regular speaker at professional conferences and has already published in numerous reviews. In addition to its extensive research on financial mathematics, he has always been keen to follow (and research on) the developments and trends in the electronic market and publish one of the early paper on ECNs.

Michel Everaert is Chief Information Officer-E-commerce at GFI. He joined the company in May 2000. Prior to joining GFI, he was Senior Sales Manager for Investment Banking Services at Logica PLC between November 1998 and April 2000. Prior to this, he held marketing and sales positions at Dow Jones Telerate and Reuters.

Thomas Serval is President and CEO of Baracoda, a technology company located in Paris, France. He is a graduate from École Normale Supérieure and holds a Masters in Business Law and a degree in engineering from French National School of Economics and Statistics (ENSAE). He focuses his PhD work on Internet Economics and its impacts on stock exchanges. He was awarded an Arthur Sachs scholarship. He has published many articles on Electronics Communication networks and the future of exchanges.
Thomas is Vice President of the French Chapter of the Internet Society and a Director of Comité Richelieu Board (French Association of High Tech Companies).

Daniela Russo is Deputy Director General of the Directorate General Payment Systems and Market Infrastructure at the European Central Bank, based in Frankfurt-am-Main., since June 2005. Ms Russo graduated in Political Sciences from the University of Catania (Italy), and has Masters qualifications in Economic Development and in Foreign Exchange Trade. She is the ECB representative in the ESCB-CESR Working Group and has chaired of one of its Task Forces. She has chaired the CPSS Working Group on Cross-border collateral arrangements.

Simonetta Rosati is Senior Market Infrastructure Expert in the Directorate General Payment Systems and Market Infrastructure at the European Central Bank in Frankfurt (Oversight Division), since May 2001. Ms Rosati has been working on policy and oversight issues concerning securities settlement systems. Ms Rosati has contributed to the analysis of the determinants of large-value cross-border payments, to the comparative analysis of prudential and oversight requirements for securities settlement, to the analysis of the securities custody industry and currently participates in the Working Group of the CPSS on Systems Interdependencies. Ms Rosati graduated in Economics at the University of Rome L.U.I.S.S. “Guido Carli”.

Jonathan Katz was an attorney for the Securities and Exchange Commission for 23 years, and served as the Commission's Secretary for nearly 20 years. In that position he participated in virtually all aspects of the Commission's regulatory and enforcement programs. Prior to joining the SEC, he worked for seven years in the US Department of Justice. Mr. Katz received a BA in economics from Colgate University and a JD from the University of Pittsburgh.

Allen Ferrell is the Greenfield Professor of Securities Law at Harvard Law School. He is also a research associate at the European Corporate Governance Institute, on the Board of Economic Advisors to the NASD and a member of the Committee on Capital Markets which is advising the Treasury Department on reform of US securities law. He received his PhD in Economics from MIT, JD from Harvard Law School and BA and MA from Brown University. He clerked for Judge Silberman on the DC Circuit Court of Appeals and Justice Kennedy on the Supreme Court. His research focuses on corporate governance, exchange regulation and disclosure requirements.

Reena Aggarwal is the Stallkamp Fellow and Professor of Finance at the McDonough School of Business, Georgetown University. She has authored numerous articles on Sarbanes-Oxley regulations; valuation and international corporate governance; IPOs in the US, Switzerland, Brazil, Mexico and Chile; regulation of emerging markets in Asia and Latin America; and functioning of stock exchanges. She was a Visiting Research Scholar at the IMF and an Academic Fellow at the US SEC. Dr Aggarwal received her PhD in Finance from the University of Maryland and M.M.S. from BITS, India.

Simon Bennett is a Managing Principal at Capco, focused on delivering transformational change to top tier clients, via both process reengineering and strategic sourcing. At Capco he has a role which combines business development with client delivery – with an exclusive focus on the Institutional and Investment Banking segment. Prior to joining Capco he spent over 20 years in a variety of management roles in the City with experience on both the buy side and the sell side. Simon holds a prize winning MBA from Henley.

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"The world of exchanges is one of the most rapidly changing features of the financial landscape. The distinguished academics and practitioners who contribute to this book provide an excellent account and perspective on this transformation. It is essential reading for all those interested in exchanges." Prof. Franklin Allen, Nippon Life Professor of Finance, Professor of Economics, and Co-Director Financial Institutions Center, The Wharton School, University of Pennsylvania

"This is an excellent collection of papers on one of the most important topics in finance - the issues and challenges facing exchanges around the world. It comprises a set of authoritative articles on the subject by leading academics, practitioners and policymakers. It should become a widely cited book and a significant contribution to the literature." Prof. Colin Mayer, Peter Moores Dean, Saïd Business School, University of Oxford

"The structure of trading exchanges has changed so rapidly that even sophisticated individuals have difficulty keeping up. The interaction of such factors as globalization, consolidation, demutualization, changing technology, and regulation is central to understanding how basic aspects of our exchange landscape are changing. The papers in the volume provide basic insights and perspectives about our evolving environment. The volume should be a valuable resource to observers and students of our marketplace." Prof. Chester Spatt, Mellon Bank Professor of Finance; Director, Center for Financial Markets, Tepper School of Business, Carnegie Mellon University

"This book assembles a number of highly informative contributions; importantly, these span the whole range of issues and aspects - technological, economic, political and regulatory - that are relevant for an informed assessment of the future of exchanges. The contributors also deftly manage to combine sound fundamental analysis with current developments and thus create value added both for scholars as well as practitioners in the industry." Prof. Norbert Walter, Managing Director, Deutsche Bank Research/Economics, and Chief Economist Deutsche Bank Group

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