Ever since the late eighteenth century, when speculators first gathered on Wall Street to trade in the shade of a buttonwood tree, lower Manhattan has stood at the financial nexus of the United States, if not the world. But today that trading dominance is starting to look a little wobbly.
Stock markets around the world are on an innovation fast track, but the United States is stuck in a relative inertia, grappling with how to adapt to the fast-paced trading of the digital age, and U.S. financial markets could soon be in danger of losing ground to their European and Asian counterparts, analysts say.
The thinking is that, while the U.S. financial markets may be the world’s largest and command a lion’s share of the world’s trading activity, a lack of vision may be putting them at a disadvantage in relation to their international peers.
“Is the United States falling behind? Yes, it is,” said Fariborz Ghadar, director of the Center for Global Business Studies at Penn State University.
“Many exchanges are really upgrading their technology and infrastructure, and they’re going to be more transparent and from the perspective of the consumer deliver a better service. But the problem is these exchanges don’t have the breadth and depth of big U.S. exchanges – that doesn’t make the U.S. exchanges better, they’re still antiquated.”
From London to the Philippines, overseas financial markets are evolving rapidly, transforming themselves into public companies, establishing international linkages and adapting their trading floors to all-electronic stock-trading venues.
In Asia, for example, management consulting firm Accenture recently announced it will be helping the 14-year-old Shanghai Stock Exchange to build a new electronic trading platform based on Deutsche Borse’s Xetra trading technology, which is also used by 16 other exchanges internationally.
“The Deutsche Borse is one of the international success stories out there,” said Bill Cline, who heads up Accenture's Capital Markets practice. “They get revenue from licensing their electronic trading platform, and also through trade clearing and settlement. Contrast that with the New York Stock Exchange and the Nasdaq market, which are mainly dependent on cash revenue from trading and information product sales.”
As trading revenue on the world’s bourses declines, financial markets in Europe and Asia are successfully diversifying their sources of revenue, said Cline, and many of them are going public. But only a few U.S. financial markets are taking similar steps. "U.S. exchanges are spending more time playing defense than offense,” he said.
The NYSE, the world’s largest stock market, is a good example. On on Tuesday it reported a third-quarter earnings loss as legal expenses and costs for corporate-governance initiatives outweighed a modest increase in revenue.
Speculation that the NYSE, a non-profit organization, may take itself public like the Deutsche Borse in Frankfurt and the London Stock Exchange, has swirled around Wall Street for years, but CEO John Thain has only said that an IPO plan is under consideration.
Cline expects more markets in the United States to go public "because IPOs are good for businesses; they accelerate diversification because they create a for-profit motive, and so businesses must look for ways to grow and diversify their revenue stream.”
He points to a recent study by the World Federation of Exchanges, a trade organization for regulated financial markets worldwide, which placed the United States behind markets in Asia and Europe in terms of diversification of products and services offered to investors. And, he cites Accenture research showing that exchanges with a diversified product range weather recessions more successfully than less diversified exchanges.
One notable success story may bode well for a Big Board IPO.
Two years ago the Chicago Mercantile Exchange, the biggest futures market in the United States, launched an IPO, sending its market capitalization up from about $1 billion to some $7 billion today. The neighboring Chicago Board of Trade, the largest venue for trading futures and options in the United States, is reportedly considering its own plans for an initial public offering.
Meanwhile, U.S. securities regulators and the NYSE are working to implement changes in the rules governing the broader market that will profoundly affect buying and selling, opening up electronic linkages between equity markets.
The first is the elimination of many size limits on electronic trading at the NYSE under a “hybrid market” plan put forward by the Big Board in August that is expected to seamlessly integrate the exchange’s floor-based operations and its electronic capabilities. The proposal is currently under review by the Securities and Exchange Commission.
Another change is a set of new SEC regulations expected to compel more brokers in more markets to execute orders at the best available prices.
The NYSE historically supported the "trade-through" rule that prevents "trading through" best prices, usually for reasons of speed. Electronic markets, or ECNs, and the Nasdaq market have argued against the rule, given their digital swiftness that some big investors prefer over prevailing price.
The NYSE, which to date has specialized in equity trading, is also expanding its product offerings, going up against the American Stock Exchange to offer exchange-traded funds, or ETFs, essentially an investment security that tracks an index.
Some have conjectured that the NYSE’s move towards more electronic trading might herald the demise of the Big Board’s floor-based trading system. Some 90 percent of the NYSE’s share volume is still handled by floor brokers.
On the Deutsche Borse, floor trading all but dried up within a few years of the introduction of the Xetra electronic trading platform. And a sharp decline in the price of a seat on the New York exchange — from about $2.5 million to $1 million — may reflect an acknowledgement on the part of traders that the floor-trading system is on its way out.