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Page last updated
February 15, 2003




The Significance of the Exchange Industry

At the Heart of the World Economy
Over the past decade, regulated securities exchanges have come to play a major new role in the international financial system. That role is qualitatively different from anything seen since World War II. Quantitatively, the markets operated by regulated exchanges have grown to a scale unimagined before, giving them an active role and responsibility at the heart of the world economy.

Exchanges have made this possible by:

 Aligning their corporate strategies with the business potential

 Training their staff and investing in infrastructure

Boosting the commerce of finance with new telecom and computer technologies

Providing stimulus and improved risk management through derivatives markets

Supporting equity savings through pension and other retirement schemes

 Participating in the reorientation of finance from bank loans into securities

 Promoting the increase in cross-border investment and trading

From the perspective of exchanges, this commercial expansion coincided with a broad trend in the last half of the 1990s to switch from a business structure based on broker cooperatives with inside ownership to for-profit limited companies with outside owners. For most of the Federation's members, business objectives changed with this new governance form. The heightened commercial feel of this industry also affected those exchanges maintaining their mutual legal form, and they have proven themselves to be successful competitors. The dynamism of these businesses is one reason for the qualitative difference in the role of exchanges in the 2000s : the markets could not have grown in scale to the extent they did if their operations were not also of good quality ­ and seen to be of good quality.

By the end of the 1990s, exchanges came to be identified with the highly commercial spirit of the times. Exchanges symbolize capitalism, and are at the heart of the system. The level of their activities gives an instant short-hand summary of entire nations' socioeconomic health. It is only natural that these enterprises be managed as dynamic businesses in their own right.

This document outlines some of the perspectives of the world's regulated exchanges : with this heightened economic significance, the operators of bourses must have their needs understood by other financial actors and by government policy makers. These persons know best how to improve the markets they operate. Their professional responsibilities prompt them to step forward to be heard.

The Transformed Position of Exchanges
In December 1990, the World Federation of Exchanges (formerly FIBV) counted 38 members. The total market capitalization of equities listed on these bourses was $ 9 400 bn, and the value of share trading for the year hit $ 6 211 bn.

By December 2001, the Federation had grown to 56 members. Total market capitalization had risen to $ 26 780 bn, after reaching a high point in March 2000 of $ 36 286 bn. The value of share trading for 2001 fell back to $ 41 225 bn, which was quite a fall from the previous year's $ 55 957 bn. Since the newer members tended to operate smaller markets, this long-term growth trend took place mainly among existing members.

This translated into :

n Growth in equity market capitalization over the period of 285 %

n Growth in trading volumes of 664 %

n Acceleration in the turnover velocity of shares from 66 % to 153 %, demonstrating the increase in liquidity provided on regulated exchanges

Enhanced business profitability, privatizations, IPOs, indexes and derivative products, and cross-border trading fed this transformation. But the exchanges themselves were the actors which adapted, invested, participated and enabled this to take place.

The Stakes
By all measures, the health of an exchange is vital to an economy. As a percentage of gross domestic product, the value of equity market capitalization of Federation exchanges varied from a low of 2 % to a high of 383 % at the end of 2000, the last year for which the IMF's GDP statistics have been provided.

The global average market capitalization for equities on members' exchanges rose to a stunning 91 % of GDP in 2000. Moreover, these assets include most of the world's most highly prized companies.

At the end of 1991, 25 980 foreign and domestic companies were listed on member exchanges. Ten years later, at the end of 2001, this number had become 35 001. The world's corporate treasurers have voted in favor of this source of funding.

In 1999, companies and governments raised new capital on Federation markets amounting to $ 754 bn, and this increased to $ 896 bn in 2000, even under difficult market conditions. Pending the final total, this did fall considerably in 2001, but exchanges remain a choice source of fresh capital for the world's enterprises and governments ­ and this change in the priority of turning to equity financing looks set to stay. Economic reliance on exchanges is perhaps the most important change in finance over the last decade.

Public policy makers, corporations, and the saving public have come to appreciate the importance of these figures ­ and when the numbers are shown in chart form the historical trend is striking.

Moreover, in many parts of the world, exchange index movements have come to be integrated into the rhythm of daily life, every few minutes on the radio, at regular intervals on television, and constantly on the Internet. The capital markets have given rise to considerable expansion of the specialized printed press, too. The names of broad equity market indices are commonly recognized as being of social importance. When the market moves more than a few percent up or down, it is big national news. When exchange trading is interrupted for whatever reason, that too is major news. Clearly, a different kind of financial business has emerged on the scene. No other actor has such an affect on the public mind, and that, too, is meaningful.

This has been happening in many countries around the world, involving by far the greater part of the world's economic life.

Exchanges' centrality to social wealth creation is established. Corporate treasurers need to factor in their ability to tap this source of cash by issuing securities, just as finance ministers try to balance national budgets with their privatizations of state-owned businesses. Public awareness of the need to invest has prompted great individual interest in equities and related exchange-traded products, too. A further benefit has been the broadening of share-ownership, and with it the loosening of market forces for better corporate governance practices.

What Exchanges Do : Fair Rules for Efficient Markets
Exchanges have a distinct identity within the financial services sector. They are not insurance companies, investment firms, banks, or brokerages. They operate regulated securities and derivative markets. These markets establish asset values through efficient price discovery, enabling the public to know how much companies are worth according to the latest news and the most recent economic outlook.

Putting together rules, know-how and technology for efficient, transparent trading of assets worth nearly one year of the world's GDP is quite a responsibility; to succeed in meeting that challenge is to build prosperity. Regulated securities exchanges provide the solutions. They are creating greater efficiencies across the value chain of the exchange industry, and diffusing ever more complex and better quality financial information to support the work of all actors in the capital markets.

Having sketched the position of exchanges as central actors in the global financial industry, this paper moves on to state some of the business questions exchange operators face.

A financial market behaves like a highly sensitive organism living in a rich, particular biological environment. Operating an exchange is therefore a proportionately complex business. Regulation helps make the markets more efficient, but much also depends on human talent and judgment, just as is the case elsewhere in the financial services industry. Governments are involved as intimately in matters of public savings as are the corporate issuers of securities and the investors themselves; together with them, operators of exchanges must get this business model right. Today, the size of this industry underscores the national and international challenge that the functioning of these markets represents.

For price discovery to occur, the business of exchanges precedes the instant of trade order execution and extends well beyond. Even if by law or custom the exchanges in every country do not operate these diverse activities directly, their involvement in them is intimate. The bundle of related businesses is what builds a coherent, secure market. The entire value chain must function smoothly, including :

n Writing the rules for market activity

n Admitting intermediaries (banks or brokers) to act on the central market

n Assuring the ability in-house to follow intermediary's positions, and so establish enforcement of market rules

n Admitting securities to listing

n Assuring on-going disclosure of corporate information

n Setting up adequate IT and communications system facilities

n Diffusing of market information to a wide public

n Trading

n Assuring prompt clearing and settlement of orders

n Providing for securities registry, transfer agent, and depositary activities

In addition to equities, Federation members conduct the majority of the world's on-exchange trading of government and corporate bonds, derivative products, investment and exchange-traded funds, warrants, and convertibles. Also in the for-profit environment now established, exchanges may go further afield in search of good returns, like other businesses do.

The Business of Running Exchanges
Whether a cooperative or a for-profit company, exchanges must serve their customers and earn money to stay in business and grow. This is what capitalism is about. This means :

n Improving staff operations and competency

n Rewriting rules as know-how, technology, products and opportunities gradually modify the market and create new challenges

n Scaling up IT and telecommunications systems

n Connecting markets to ever more players

n Enhancing surveillance and control functions in an environment of growing complexity as concerns actors, instruments, and interaction between different types of securities, often with cross-border involvement

n Improving the information disclosed on companies and market data

n Facing up to aggressive national and cross-border competition

n Investing reserves strategically

n Assuring a good return on capital

A growing number of exchanges have introduced the shares of their companies on the markets they operate, emphasizing at the same time the for-profit and public nature of this industry.

With this mix of questions in mind, it is notable that technologies and efficiencies at exchanges have enabled them to lower unit costs over the 1990s. Total revenue growth has been strong at 316 %, but it has also been remarkably lower than the 665 % increase in trading volumes. The benefits of scale and technology were passed on to customers.

Challenges for Exchange Managers
There is a public good in operating an exchange, and managers certainly recognize the importance of this. But bourses are not the only segment of financial services to have this distinction, and the question must be kept in proportion. However huge the markets relative to the economy, in the end, exchanges are about running regulated businesses. On balance, one cannot have regulation without a prosperous business environment, and one cannot have a prosperous exchange without clear rules and respect for them.

Intangibles matter to exchanges : their market-neutral position, and the value of their reputation for fairness and transparency in the conduct of trading. Managers do their utmost to enhance the quality of these assets, for they are commercial elements central in running the business.

The question is sometimes implied that the quality aspects of the business, the assurance of regulatory services, is not entirely compatible with a for-profit environment. Yet all businesses must assume costs of quality for goods and services, whatever the industry. Curiously, at the end of 2001 in many countries, exchanges are subject to particular questioning on this point, just as the market scale itself demonstrates the proper functioning of market mechanisms. Volume growth and reduced spreads demonstrate the enhanced operating efficiency of exchanges.

The size of the exchange industry is small compared to the economic function of the markets operated. Including consolidated companies, Federation members at the end of 2001 employed 17 703 people. The audited figures for December 2001 and not yet in, but members had a total capital base of USD 7.3 bn in December 2000. There is a disproportion between exchanges, insurance companies, banks, and investment firms; each has key financial functions to fulfill, including in the capital markets, but exchange managers now need to participate more fully in public policy debates when their business is discussed. The public policy agenda in most markets is disproportionately concerned with issues of banking and insurance; the figures demonstrate the need for greater focus on regulated exchanges. Their successful evolution going forward cannot be taken for granted, and the experience of bourse managers must be put to use as a key tool in devising proper policies.

Exchanges need independence and freedom to operate within the rules of the regulatory environment. Too much interference by governments will impede the market function. The goal to pursue, the hard balance to find, will involve unleashing the full benefit of an exchange within the set rules of the local jurisdiction, remembering that there will never be a situation of zero risk for investors or issuers ­ and governments should not be trying for that. That simply is not what financial markets are about, and even to imply that would give a poor sense of this business to many actors involved in exchanges.

Out of ignorance of the complex mechanisms involved, or in an attempt to seize business opportunities, competitors make curious statements about exchanges. Too many other actors speak about exchanges without the proper knowledge and expertise that only the operators of markets themselves have acquired. Also, on occasion, experimentation with new rules and regulations in some markets, rather than planned adaptation to changing commercial conditions, has led to sharp falls in trading, and notable widening in bid-ask spreads - the two sure signs that the market has become less efficient. One truly must be careful about nurturing these complex businesses.

As a social responsibility, and equally as an essential part of their further business development, exchanges wish to correct inaccuracies in the discussions about regulated markets. They must take their proper place in financial policy debates. This place must be institutionalized and seen to be a normal part of capital markets work.


American Stock Exchange

Athens Stock Exchange

Australian Stock Exchange

Barcelona Stock Exchange

Bermuda Stock Exchange

Bolsa de Comercio de Buenos Aires

Bolsa de Comercio de Santiago

Bolsa de Madrid

Bolsa de Valencia

Bolsa de Valores de Bilbao

Bolsa de Valores de Lima

Bolsa de Valores de Lisboa e Porto

Bolsa de Valores do Rio de Janeiro

Bolsa de Valores do São Paulo

Bolsa Mexicana de Valores

Bourse de Luxembourg

Bourse de Montréal

Budapest Stock Exchange

Canadian Venture Exchange

Chicago Board Options Exchange

Chicago Stock Exchange

Colombo Stock Exchange

Copenhagen Stock Exchange

Deutsche Börse AG

Euronext Amsterdam

Euronext Brussels

Euronext Paris

Helsinki Exchanges

Hong Kong Exchanges and Clearing

Irish Stock Exchange

Istanbul Stock Exchange

Italian Exchange

Jakarta Stock Exchange

JSE Securities Exchange, South Africa

Korea Stock Exchange

Kuala Lumpur Stock Exchange

Ljubljana Stock Exchange

London Stock Exchange

Malta Stock Exchange

National Association of Securities Dealers

New York Stock Exchange

New Zealand Stock Exchange

Osaka Securities Exchange

Oslo Børs

Philippine Stock Exchange

Singapore Exchange

Stock Exchange of Thailand


SWX Swiss Exchange

Taiwan Stock Exchange Corporation

Tehran Stock Exchange

Tel-Aviv Stock Exchange

Tokyo Stock Exchange

Toronto Stock Exchange

Warsaw Stock Exchange

Wiener Börse


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