One Exchange to Rule Them All?

The CME (CME) is now attempting to merge with the NYMEX (NMX)? I can't even keep track of them all. Why don't you guys all just set up one Central Exchange and get it over with?

Consolidation can be a good thing. Businesses are sometimes able to build nice efficiencies through mergers that they can then pass along to their end users. But if you get too much merger fever, customer service can suffer even as prices go up. And that is the issue that concerns me as we appear to move toward an NYSE/NASDAQ/CME system of exchanges in the U.S., down from about 20.

In terms of allowing it all to happen, I assume the regulators have us covered, right? Yeah, sure. Again, from an index/ETF investor perspective, the things I worry about are the quality of service the product issuers are getting (this is one part of determining how wide the competition is among issuers), and then most importantly, the quality of execution and the fee levels that exchanges are charging.

In the ETF business, the recent history has seen us move toward tighter and better markets and lower fees all around. It's a boon akin to the one travelers enjoyed in the early days of airline deregulation. A spate of electronic trading firms popped up that were the equivalent to the Jet Blue's and AirTran's of today. They forced technology to improve order execution and provoked a fierce battle on cost at just about every level of the exchange business. And investors, by and large, have benefited enormously from these developments. But hopefully the quality of service (and healthiness) of the exchanges won't look like the quality of airline service and healthiness of carriers right now in the U.S.

Now it will be all eyes on markets to see how things play out. One side benefit is that I assume that this will encourage the NASDAQ (NDAQ) to be a more robust competitor in our [ETF] part of the investing world. This, together with the Amex's integration into the NYSE's (NYX) ETF business could actually serve as a boon to issuers, at least in the near term. You can talk to all the major issuers in about a year and get a quick and accurate read of the pulse in those terms. What is of a greater concern, particularly in the less-traded issues, and for smaller lots, will be the potential for some wide spreads to creep in here and there - and that's something we'll keep a close eye on.

If things swing wide enough in terms of cost, the large institutions have already shown that they're not afraid to step in and take control (see the ICE), and that alone should help to keep the exchanges honest. It's not far-fetched to think that such a cooperative equities-trading platform could emerge. Some of the big players have already looked at existing platforms to use as a base. They'd better get to it, because fewer and fewer of those are available.

It's going to be interesting to see how things play out. Far from the dust settling, the activity around the ETF business and with market structure is feverish. It will take some time for us to be able to accurately gauge what we're looking at when there's just One Exchange to rule us all.

Written by Jim Wiandt

Comments

[Reinko]

Not often you read such a weird article, one exchange to rule us all...

Well in fact there is already such a large exchange, have you never clicked on nasdaq.com? And can't you select there from DOW industrial to nasdaq to S&P 500?

Don't the graphs look very similar?

And when they do not look similar, why beat out the last of human local market behavior?

Why let the computer programs rule our future, just listen to them:
"We will bring you profit if you know our daily parameters."

Why one big market ruled by computers? Have the Americans gone nuts or so? Don't forget: The last 600+ points rally on the DOW was done with computer trade...

Have a nice life or try to get one!

[Reinko]

And there is more to be said upon this subject: The SEC only lives in the past and is making court house cases only when humans are involved in 'one company' weird volume.

When entire markets are manupilated these SEC weasels keep their mouthes shut, so welcome welcome the one big market stuff...

[sango]

There are still some US exchanges left such as Philadelphia, Boston and CBOE. And the big financial companies such as JPM,GS, C are building their own trading platforms to compete against CME.