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Stock Exchanges: An Industry In Decline?

May 29, 2012 | About:
Intelligent Speculator

Intelligent Speculator

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Last week, I did give you an indication of one sector that I’d be unwilling to try investing in these days. Banks in general are difficult to value but especially European banks. They have so many ongoing issues, have some terrible loans on their books, hold bonds that are not marked-to-market, have all kinds of messy relationships with each other (problems of one bank will get the next one in trouble, etc)… It’s a big mess and I’m personally going to stay away for some time.

That Other Sector I Think You Should Avoid

A few months ago, stock exchanges were the next big thing. They were in a race to become global leaders by buying each other with exchanges outbidding themselves to compete with with the global leaders such as the Nyse (NYX) and the Nasdaq (NDAQ). I would argue that difficult times are ahead for stock exchanges in general.

Difficult Environment

Take as an example the Toronto Stock Exchange which used to control and dominate trading volume in Canada with close to 90% of market share or major exchanges such as the Nyse and Nasdaq. In recent months, they have lost considerable market share to smaller players, dark pools, etc. It just seems like large institutional investors have been able to find better trading venues (especially in terms of price execution and fees).That has ended up meaning very big market share losses, pressure to reduce fees, etc. Take BATS as an example, a US exchange which has been gaining market share in recent months at a very impressive pace.

Huge technology spending is now required because of all of the changes that are occuring with players looking to save pennies here and there.

Regulatory Environment

Because of all of the different issues that have been found in recent years (Madoff, etc), there are increased regulatory issues to deal with from agencies such as the SEC and others. That certainly makes life much more complicated for exchanges such as NYSE that have to hire lawyers, and all kinds of other staff to improve.

Even On The Higher Profit Activities

Traditionally, two alternative ways for exchanges to make profits were to have companies start listing their stocks and selling data. Both sources are under heavy pressure.

IPO’s: If you followed the Facebook IPO at all, you’ll know that both Nasdaq and NYSE were fighting to get it listed. Over the years, more options are being made available both at home and in international markets making it more difficult to charge large amounts for these listings. As it that was not enough, with all of the algo trading, it has become a major challenge to support big IPO’s such as the recent Facebook one which ended up resulting in many different issues for Nasdaq which might end up costing a lot in terms of fees and violations.

Data: There are increasing numbers of firms that have access to data and are able to resell and package them. That has made it much more difficult for exchanges to make huge amounts of money, especially when you compare with a few years ago when live prices are something you couldn’t even find online without paying important sums of money.

For all of those reasons and many others, I’m personally fairly negative about the long term perspectives for big exchanges… yes they are able to sell co-location which has been a tremendous source of revenues but that isn’t enough to overcome everything else…


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