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Equity Markets in Transition pp 3–14Cite as

Exchange Organizations: Thoughts and Reflections

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Abstract

The stock market’s animal spirits are symbolized by the striking bronze sculpture of an oversized bull installed in 1989, deep in the heart of New York’s Financial District in downtown Manhattan. It is a charging bull, the work of artist Arturo Di Modica. The bull speaks of pure force, unfettered optimism, and aggressive dynamism. And it is quintessentially American, as well as being a grand celebration of Wall Street.

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Notes

  1. 1.

    I emphasized this already before the onset of the financial crisis; see [2]: “As positive as the general development may be from an investor’s point of view, it also contains risks in terms of systemic stability. […] One of the central functions of an exchange organisation—apart from capital allocation, liquidity creation and company valuation—is risk transformation. This refers to a broad range of risks […]: 1. market risks, 2. counterparty risks, 3. operational and transfer risks” (p. 20; own translation from German original).

  2. 2.

    See, e.g., the interview by Fortune magazine with Robert Greifeld, CEO of Nasdaq OMX, 3 September 2014 (Nasdaq CEO: We have to confront brutal reality). Its introduction sums up Nasdaq’s development towards horizontal and vertical diversification under his leadership: “When Robert Greifeld, 57, became Nasdaq’s chief in 2003, it ran one equity market in the U.S. Today, it owns and operates 26 markets globally for trading stocks, bonds, derivatives, and commodities; its technology runs 70 markets on six continents.”

  3. 3.

    See [8].

  4. 4.

    For the narrative justifying the thinking behind this, see [4].

  5. 5.

    Strategically, IT along the whole value chain means faster, cheaper, and better performing systems; the game of economies of scale, with a base of fixed cost; international/global reach; more transparent trading, and better surveillance; increasing consolidation pressure; and that liquidity pools can be built faster and at lower cost, but they are much more vulnerable.

  6. 6.

    See [6, 7].

  7. 7.

    See [3].

  8. 8.

    See ([6], 52f).

  9. 9.

    See ([6], 84ff).

  10. 10.

    The Penguin Dictionary of Philosophy ([5], 2nd edition, pp. 278–279): “In pursuing felicity as they see it, people naturally exercise the right—‘the right of nature’, Hobbes call it—of judging for themselves how best to get what they want. Problems arise when individuals want the same thing, or when greedy or vainglorious individuals—they need only be a minority—act in character and want more goods or esteem than their neighbours. In all of these cases, commonplace in the nature of things, people are anti-social. They come into conflict. The conflict need not manifest itself in outright fighting, but there is always a danger that it will. Indeed, the right of nature entitles people to use violence in pursuit of their aims if they judge it to be appropriate. Even extreme violence may be justified by the right of nature. In this way the state of nature can amount to a state of war, and indeed is likely to. Either violence will be resorted to gratuitously by the greedy and vainglorious; or it will be resorted to reluctantly and reasonably by moderates intent on protecting their lives and goods from those who are immoderate.”

  11. 11.

    Referring to both IT and market stability.

  12. 12.

    The sheer scale of the Dodd-Frank Act is as impressive as it is severe in its impact on the market: The 900 pages of the Act itself are complemented by further 9000 pages of implementation measures. By way of comparison, the user manual for the space shuttle only has 1200 pages.

  13. 13.

    For example, the Dodd-Frank Act (http://www.gpo.gov/fdsys/pkg/PLAW-111publ203), Basel III (www.bis.org/bcbs/basel3.htm), or the EU Capital Requirements Directive IV (ec.europa.eu/finance/bank/regcapital/legislation-in-force).

  14. 14.

    Digitalization refers not only to the use of IT systems to organize markets, but has even wider implications for the economy as a whole. It has the potential to destroy and redefine value chains from scratch. Under labels such as “Industry 4.0” in Germany, digitalization will further enhance the role of IT by automating decisions about production, marketing, and distribution to an extent unknown before. In exchange trading, the use of algorithms for automating trading decisions has to some extent anticipated this development. Of course, this also means that IT-driven processes might become more vulnerable to manipulation or to organized cyber criminality. In response, risk management processes need to be supplemented by IT security plans.

  15. 15.

    For details see WEF Report on the future of financial markets: http://reports.weforum.org/future-of-financial-services-2015/.

  16. 16.

    Blockchain is a database with the following attributes:

    • Modular and distributed with a network of communicating nodes, providing a distributed and public ledger accessible to whom it may concern.

    • Transactions are stored and verified on every node of the network and each copy contains the full history of all transactions.

    • Consisting of blocks that are added in chronological order, building the chain. Each block contains a certain number of transactions and is inscribed with an automatically generated check number.

  17. 17.

    http://www.bis.org/statistics/derstats.htm.

  18. 18.

    For this and the following, cf. [1]. Deutsche Börse’s successful General Collateral (GC) Pooling service for the interbank market, which also includes the Eurex central counterparty, sets an example that CCP services can be extended beyond securities and derivatives trading; see http://www.eurexrepo.com/repo-en/markets/gc-pooling-market.

References

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Authors and Affiliations

  1. Wirtschaftswissenschaftliche Fakultät, University of Basel, Peter Merian-Weg 6, Basel, 4002, Switzerland

    Reto Francioni

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  1. Reto Francioni
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Correspondence to Reto Francioni .

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Editors and Affiliations

  1. Faculty of Economics and Business Administration, University of Basel, Basel, Switzerland

    Reto Francioni

  2. Zicklin School of Business Baruch College/CUNY, New York, New York, USA

    Robert A. Schwartz

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Francioni, R. (2017). Exchange Organizations: Thoughts and Reflections. In: Francioni, R., Schwartz, R. (eds) Equity Markets in Transition. Springer, Cham. https://doi.org/10.1007/978-3-319-45848-9_1

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