MIS 3090:IT for Financial Services

The Major Global Stock Exchanges:HBS Case and Articles

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Exchanges…

Exchanges are set up to quote and trade financial products, including: stocks or equities Bonds Public debt instruments Derivatives (options and futures)

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Auction vs. Dealer Markets

Listed markets are primarily auction markets Orders are centralized and funneled through

specialists Listed markets in US are NYSE, ASE, Pacific, SF, Phl,

Chi, Cinci, Boston

OTC markets are mainly dealer markets Decentralized trading on computer network Bonds and debt on OTC Data shared across exchanges with the ITS NYSE and NASDAQ getting more similar

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NYSE

Largest and most liquid exchange Offers prestige, low volatility (?), high liquidity

Began in 1792 Open call auction 1867 started using the stock ticker Continuous trading replaced open call in 1871 Overhauled governance in 1938 Abolished fixed commissions in 1975 Congress mandates NMS and ITS in 1978 After 1987 crash made major tech investments

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SWOT Analysis for the NYSE

Strong leadership & “brand”Capitalized on ASE and NASDAQ misstepsAggressively adding foreign listings and global brand (EuroNext)Proposing longer trading hours

Viewed as private clubFailed in derivative areaLimited success in bonds and portfolio tradingDid not capitalize on value of market dataRun as a business

Demutualization?

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NASDAQ

Self-regulated dealer system No bonds Set up in 1971 to automate OTC Good for small, emerging companies

(tech) Large tech companies have banking

relationships with NASDAQ market makers so they are reluctant to leave

Price-fixing scandal in 1997

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NASDAQ SWOT

Market cap >$5THighest av. Daily volume of sharesHigh growth, technology centeredExpanding internationally

NASDAQ Europe

Faster executionSOES, and Super SOES

High market volatilityHurt by tech downturnCompanies leaving for NYSETrading costs for institutional investors 69% higher than NYSESOES “bandits”Demutualized in 2001

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LSE

Largest in EuropeMost international exchangeWent to screen-based trading in 90’sDemutualized in 2000Failed merger with Deutsche BorseProblem with “Wimbledon effect”?

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Deutsche Borse

Operates Frankfort exchange and the NeuerMarktOperate the world’s largest derivative exchange Eurex Linked with CBOT to offer global operations

Provides bond index pricesDemutualized in 20013rd largest in world, 2nd in Europe

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Other European Exchanges

Euronext created out of French, Dutch, and Belgian exchanges Merging with NYSE

EASDAQ Failed to attract companies Acquired by NASDAQ in 2001

Virt-x for blue chip Euro stocks in 2001Jiway failed in 2001 as a pan-Euro exchange

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Competition Among Exchanges

Continuing consolidation of exchanges as new ones sprout “network effect” of NYSE? Growing clout of institutional investors? Fragmentation with consolidation similar to

ITS? Systems that support multiple listings? ECN alternatives? Payment for “order flow”?

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Technological Snafus

Feb. 27, 2007 Heavy trading clogged networks

Trades taking minutes Web sites down Unsuccessful transactions DJIA miscalculations Lack of system diagnostic tools and notifications Suspended electronic trading

NYSE aggressively moving to expand e-trading with new Hybrid System

10% of trading was electronic in 2004

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Exchange Glitches cont…

1998 errors NYSE trading halted for 1 hour on a Monday

Hardware or “system communication problems” Just finished a $1B upgrade of systems NASDAQ and regional markets functioned

Melbourne market…lost $80B/hourIndian exchange shut down yesterdayOn Tokyo exchange, a firm lost $225 due to a typing error, Dec 14, 2005.

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Case Questions…

How are markets evolving?How are trends in IT impacting this evolution?What are the impediments to a global stock exchange?How is market governance changing?What is the “Wimbledon effect”?What is the “network effect”?

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Terms to know

Auction vs. dealerListed marketsITS and NMSEuronextDemutualizationSOES and SOES “bandits”

Wimbledon effectNetwork effectEurexECN alternativesOrder flow

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ConclusionConclusion Advances in technology has provided the opportunity for

straight-through systematic processing for orders from the trading desk to the trading floor at incredible speeds

Technology has enabled NYSE to operate more efficiently.– NYSE aver. daily volume in 2007: 1.9 B shares– Program trading represents about 60% of all trades daily

The NYSE remains one of the world’s most technologically advanced exchanges and is continually striving to upgrade and enhance current technologies

Little possibility that trading will be exclusively electronic (like NASDAQ) and all trades will be paper-less

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For Next Class…For Next Class… Read

– NASDAQ Stock Market articles– Visit the Philadelphia Stock Exchange website (www.phlx.com)