Contents:

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

Summary:

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.