Thursday, October 15, 2009

New York and London losing market share as electronic exchanges on rise.

The New York Stock ExchangeImage by via Flickr

The New York Stock Exchange (NYSE) now NYSE/Euronext, founded in 1909 is under attack. Not from terrorists, but from upstart electronic exchanges that are continually taking market share from the "Big Board"! As of this date, only 37% of "all" trades in the USA are actually conducted on NYSE.

The rest are conducted on smaller, more nimble, electronic exchanges, known mostly to only the brokers and trading companies. Some are considered "Dark Pools" where major traders have an advantage of seconds over average investors, and not even the SEC or other regulators actually have an indication of just how much trading occurs.

NYSE is fighting back with it's ARCA exchange in Chicago which conducts about 11% of all trades, and holds sway in the giant Derivatives Market. It is also building electronic trading centers in New Jersey and London.

The largest upstart, however, is a direct competitor which is not much known outside of trading circles. The "Direct Edge" Exchange is located in Jersey City and may conduct as much as 15% of all trades conducted in the United States.

The "BATS" Exchange is a small, quiet operation in Kansas City Kansas, far away from the hustle and bustle of Manhattan, but doing about 11% of the nations stock trading. As a direct result of all of this activity, the NYSE/Euronext has lost almost 75% of it's stock value, traded on it's own exchange. The Canadian TMX group is also quietly researching U.S. cities for a stake in the game.

Even the venerable London Stock Exchange (LSE) is under pressure from smaller exchanges popping up on the continent. After dominating trading in Europe for 208 years, the LSE is losing business to upstart electronic exchanges at a fast rate. Up from only 8.5% last year to over 20% this year. Small upstarts are taking market share at unprecedented speed. Speed? Well that is the issue, isn't it. At this writing, the LSE is in talks to buy an electronic exchange called "Turquoise" which was set up in Europe by seven investment banks including Goldman Sachs and Morgan Stanley. London recently bought a small tech service company called MillenniumIT located in Sri Lanka. We are indeed investing in a Global village of trading platforms now.

Many of these upstarts got their start from disgruntled traders and investment houses tired of the huge fees and glacial movements of these monoliths of the capitalist system. Basically, 18th and 19th century ideas for trading don't really belong in the 21st century. The basic premise of trading does, but not the execution nor the idea that a privileged position on an exchange should give one segment of the investment community, the upper hand over others. Ominously, the "others" have now gained a similar advantage utilizing super computers and "flash trading"! No doubt, it's the same old crowd with new toys and a new privileged position. The more things change, the more they stay the same. "Wall Street" as it is referred to by the media these days, is not actually a street in New York anymore, but a club of high speed traders, in various pockets of electronic trading circles. As George Carlin once said "It's a big club, and your not in it"!

Being the catalysts for biggest players in the "Big Club" the NYSE and LSE are being hauled kicking and screaming into the 21st century. People don't give up privilege easily, unless, of course, it is replaced by more privilege. In the mean time, the smaller, more nimble upstarts will gain market share, and that gives opportunity to small fries like us.

In Chicago, which has dominated the derivatives market (futures, options etc) for almost as long, the same thing is occurring. CBOE, CBOT, CME, CFE have consolidated and merged operations to try and fend off high speed electronic futures exchanges and Options Exchanges like the ISE, ICE, ELX, OMX, OneChicago and EUREX, etc. There are also many trading companies that have developed or are developing their own, proprietary, electronic trading platforms. The exchange business is now a horse race, no longer dominated by the old favorites. It is Capitalism at it's best, and it's worst. Could this race be the next catalyst for calamity in the markets? No one knows for sure. Today the U.S. is implementing a strategy for regulating of the Derivatives Market.

If you are betting on this race, bet on the smaller, faster horses to win in the "short term". But don't discount the big dogs in the long run. That is why they are called big dogs.

Good investing


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