Advances in technology, competition from abroad and investors' desire for the lowest-cost trading methods will force many U.S. securities and commodities exchanges to consolidate in the next five to 10 years, say several industry observers and institutional money managers.
Gary Kemp, chief executive officer of Trading Technologies, New York, said he believes within the next two years only two exchanges will remain in Europe: Eurex and one other; which other one, he's not sure. Trading Technologies develops and services software for electronic trading platforms.
Also by that time, a similar round of consolidation should be under way in the United States.
"In the U.S., it's more like a five-year scenario," said Mr. Kemp. "But within five years, it's nearly over and there are going to be just a few (exchanges) left."
Which ones? Mr. Kemp, who understandably favors electronic exchange platforms, said the New York Stock Exchange and Nasdaq are the most likely candidates because they have built what he calls successful business platforms.
"Equities are such a huge business, and that gives them a huge amount of profitability and momentum," Mr. Kemp said. "They have the ability to be the acquirers in the future."
Despite the fact that major U.S. exchanges, like the NYSE and Nasdaq, have been slow to embrace electronic trading platforms, he said the regulatory favor they enjoy and the capital they can access makes them likely candidates to acquire, rather than be acquired.
View on dominance
Mr. Kemp is not alone in his views on exchange consolidation, although he is among the few to predict the dominance of the NYSE and Nasdaq.
Harold Bradley, president of American Century Ventures and senior vice president at American Century Investments, Kansas City, Mo., spoke about exchange consolidation just before flying to London for a meeting at the Tradepoint Stock Exchange. Tradepoint, which links fund managers and broker dealers electronically, recently formalized an agreement with the Swiss Stock Exchange to start trading shares of European blue-chip stocks that had been traded on the Swiss exchange.
Tradepoint is an example of what Mr. Bradley thinks consolidated U.S. exchanges might look like: An electronic network linking buyers and sellers directly, offering equal and anonymous market access.
But that won't happen here without some easing of the regulatory authority exercised by the Securities and Exchange Commission, Mr. Bradley said. The current regulatory framework protects exchanges like the NYSE and the Nasdaq from competition.
"The NYSE and the Nasdaq have regulation on their side," he said. "If they are forced to compete -- if regulatory latitude is given to birth new competitors -- then that will put the onus of competition on (the NYSE and the Nasdaq). If they adapt and win, then that's great. We win. Our investors win."
Mr. Bradley said investors naturally seek the lowest-cost trading platforms, which many think favors electronic trading, rather than open outcry.
Predicting niche survival
Unlike Mr. Kemp, Mr. Bradley said he sees consolidation among the exchanges, but only to a point. Smaller, regional "niche" exchanges likely will survive longer because with their smaller organizational structures, they are able to adapt more quickly to changes in the market and new technology.
Larger U.S. derivatives exchanges like the Chicago Mercantile Exchange, the Chicago Board of Trade and the Chicago Board Options Exchange are more likely to be absorbed into entities like Eurex, the NYSE or the Nasdaq, Mr. Bradley said, particularly if they are not quick in responding to demands of business-to-business electronic markets.
"We are going to see cross-financial mergers between commodity, stock and options exchanges," Mr. Bradley said. "Trading different asset classes in different places makes it far more difficult to do any risk management or assessment. And it's highly likely for a European exchange to come over here. Electronic connectivity respects no political or physical boundaries."
So far few, if any, boundaries are being respected on the Continent. Eurex, the result of a merger between exchanges in Germany and Switzerland, is now the world's largest derivatives exchange, trading upward of 2 million contracts a day, double the volume at the Chicago Board of Trade. Euronext, the result of mergers between the Paris Bourse and exchanges in Amsterdam and Brussels, is now the eurozone's largest stock exchange.
Canadian exchanges have consolidated, also. The Montreal Exchange last year gave its senior equity listings to the Toronto Stock Exchange, and in turn Toronto sent its derivative products to Montreal. The Vancouver, Calgary and Winnipeg stock exchanges merged with the Canadian Dealing Network. Some have surmised that those mergers won't be enough to keep Canada's exchanges liquid, however, and that in time they may merge with U.S. exchanges.
As consolidation swirls all around them, exchanges in Chicago have taken steps to strengthen their own positions. The CBOT formed an alliance with Eurex to provide global electronic trading. The CME has formed a partnership with the London Clearing House and the London International Financial Futures and Options Exchange, giving members access to each other's electronically traded products. And the CBOE plans to launch a screen-based electronic trading platform early next year.
All of which may or may not help the Chicago exchanges overcome the disadvantage of their hesitancy to move into global electronic trading and their reluctance to join forces.
A few big ones
Junius Peake, a professor of finance at the University of Northern Colorado in Greely, Colo., and former vice chairman of the National Association of Securities Dealers, is among those who think having three exchanges in Chicago -- and many more smaller exchanges scattered about the country -- does not make sense.
Mr. Peake sees a day when all trading will be done using a few large, electronic exchanges. The moves by U.S. exchanges to demutualize, or go from member-owned not-for-profit organizations to for-profit stock corporations, will accelerate consolidation, he said, adding technology and institutional investors' desire for lower-cost, simplified trading will drive that consolidation.
"Institutional investors, most of them do want one exchange," Mr. Peake said.