MIS 3090: IT for Financial Services The Major Global Stock Exchanges: HBS Case and Articles

September 7, 20152/16 Exchanges… Exchanges are set up to quote and trade financial products, including: stocks or equities Bonds Public debt instruments Derivatives (options and futures)

September 7, 20153/16 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

September 7, 20154/16 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

September 7, 20155/16 SWOT Analysis for the NYSE Strong leadership & “brand” Capitalized on ASE and NASDAQ missteps Aggressively adding foreign listings and global brand (EuroNext) Proposing longer trading hours Viewed as private club Failed in derivative area Limited success in bonds and portfolio trading Did not capitalize on value of market data Run as a business Demutualization?

September 7, 20156/16 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

September 7, 20157/16 NASDAQ SWOT Market cap >$5T Highest av. Daily volume of shares High growth, technology centered Expanding internationally NASDAQ Europe Faster execution SOES, and Super SOES High market volatility Hurt by tech downturn Companies leaving for NYSE Trading costs for institutional investors 69% higher than NYSE SOES “bandits” Demutualized in 2001

September 7, 20158/16 LSE Largest in Europe Most international exchange Went to screen-based trading in 90’s Demutualized in 2000 Failed merger with Deutsche Borse Problem with “Wimbledon effect”?

September 7, 20159/16 Deutsche Borse Operates Frankfort exchange and the NeuerMarkt Operate the world’s largest derivative exchange Eurex Linked with CBOT to offer global operations Provides bond index prices Demutualized in rd largest in world, 2 nd in Europe

September 7, /16 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 2001 Jiway failed in 2001 as a pan-Euro exchange

September 7, /16 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”?

September 7, /16 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

September 7, /16 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/hour Indian exchange shut down yesterday On Tokyo exchange, a firm lost $225 due to a typing error, Dec 14, 2005.

September 7, /16 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”?

September 7, /16 Terms to know Auction vs. dealer Listed markets ITS and NMS Euronext Demutualization SOES and SOES “bandits” Wimbledon effect Network effect Eurex ECN alternatives Order flow

September 7, /16 Conclusion  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

September 7, /16 For Next Class…  Read – NASDAQ Stock Market articles – Visit the Philadelphia Stock Exchange website (