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Exchanges Around the World
Technology has fueled the growth of global trading over the past decade, fostering dreams of a single universal marketplace. Yet, investors who have diversified their portfolios across borders and product lines might not always know how their orders are handled on a multiplicity of exchanges and market centers around the globe.
Rules and trading technologies differ significantly not only from one country to the other, but often from one exchange to the other. Rules change frequently too, as exchanges continue to evolve from members-owned monopoly utilities into competitive execution businesses.
Interactive Brokers LLC (IB), which provides direct access to over 50 exchanges and market centers around the world, has incorporated these various exchange rules in its SMART-routing technology to ensure that customers obtain true best execution, no matter what product they trade or where they trade it.
The business of the exchanges is in flux, due to heightened competition and the consolidation trend inherent to a utility-type sector. A number of exchanges have already demutualized and turned themselves into for-profit corporations, some of which are publicly traded. Other markets are merging to better compete in a low-margin business where innovations require substantial investments.
U.S. exchanges face important regulatory challenges as well, with the Securities and Exchange Commission mulling crucial reforms to modernize U.S. capital markets in the 21st century.
The proposed Regulation NMS would acknowledge the advance of electronic trading and likely force the remaining floor-based securities exchanges to alter their model in order to remain competitive. In anticipation of the changes, the New York Stock Exchange has already submitted a proposal for a new hybrid model.
An even bigger challenge may come from the SEC concept release on self-regulatory organizations. It questions the “advisability of implementing enhancements to the current SRO system or pursuing an alternative regulatory model,” which could lead to a single independent regulator with no business ties to the exchanges. Without a regulatory franchise, exchanges would be businesses fighting for customers.
IB has followed how trading began and is still evolving on the major venues that its Universal platform accesses via broadband to trade equities, exchange-traded funds (ETFs), options, futures, foreign exchange and bonds. With Universal, IB provides a gateway to global markets and multiple products from a single account in a single currency.
Stock exchanges were born in the 15th century in Burgundy’s main trading centers of the north, now Belgium. They were called bourses, from the Latin bursa or purse—three of which were on the crest of the Van der Beurse, a family of financiers in Bruges.
The Beurse mansion was a popular meeting place for Italian bankers who traded bills of exchange. Invented by Francesco Datini, a 14th-century Italian merchant, the bill of exchange was an essential instrument for banking and international trade as it covered both the lending and transfer of funds in different currencies between Europe’s main trading centers. Although it amounted to credit, the bill of exchange did not bear interest rates, hidden in exchange rates, thus allowing bankers to get around the Church’s ban on usury.
The first liquid financial instrument, the bill of exchange was instrumental in creating the first security market—complete with gold fixing—in the Beurse mansion as early as 1409. Bruges, therefore, earned the title of the city hosting the first organized market.
North Italian bankers, including the Medici, dominated lending and trade financing throughout Europe and brought the bills of exchange to all major trading centers, usually harbors or cities hosting trade fairs. These bankers were known as Lombards, a name that was synonymous with Italians in the Middle Ages, in reference to the 36 duchies then ruled by the Longobards. They were so influential that, to this day, many financial centers of Europe have streets named after them.
Bruges’ role as a leading international trade center relied on its access to the sea via the Zwyn canal. But silt eventually closed Bruges’ harbor and the city lost its economic prominence to the port of Antwerp, where merchants ran an exchange in 1460. In turn, when Antwerp’s role declined amid political turmoil, Amsterdam—where the first stocks were traded as opposed to securities—emerged as the new financial center of the 16th century, soon followed by London and Lyons.
Many of the sophisticated financial inventions of the late Middle Ages and early Renaissance have laid the foundation for our modern markets.
Stock exchanges in Asia developed much later than in Europe or America, with the Bombay Stock Exchange, launched in 1875, being the oldest organized market in the region, followed by the Tokyo Stock Exchange three years later.
However, futures trading took off in Japan, with the Dojima rice futures market, in Osaka, laying claim as the world’s first organized futures exchange, complete with hedging.
While they were off to a late start amid dramatic historic events, Asian stock markets were quick to adopt cutting-edge strategies and experience rapid growth. They espoused technology, demutualized and listed their own shares long before U.S. markets did.
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Exchanges have been part of the fabric of the American economy and history since the 18th century.
In 1790, Philadelphia merchants, who had helped finance the Revolutionary War effort, supported the creation of the first U.S. stock exchange to trade the young federal government’s $80-million debt.
Spurred by the ensuing speculative boom, 24 traders gathered at 68 Wall Street in 1792 and signed the Buttonwood Tree agreement that marks the foundation of the New York Stock Exchange. The agreement sought to regulate commissions to trade war bonds issued by the young U.S. government as well as two banks. One of these, the Bank of New York, is still listed on the NYSE today.
The event that shaped trading on the world’s largest exchange occurred in 1875 when NYSE broker James Boyd hurt his leg. Lacking the mobility to scout the crowd of buyers and sellers in various issues, Boyd sat at a specific spot and handled a single stock, Western Union. Customers quickly found it was more convenient to always trade the same stock from the same place, leading to the creation of the specialist system where supply and demand are matched in an auction process.
Today, much of the NYSE’s order flow still comes via floor brokers who act as agents for a brokerage firm’s customers, bringing buy or sell orders to the specialist post. Floor brokers, if they work for a firm, may also represent proprietary orders. Independent floor brokers perform the same task, except that they do not work for a specific firm but help handle orders.
From his post, the specialist manages the auction process, based on his exclusive knowledge of the buy and sell orders entered in his book by the floor brokers. At times, the specialist himself is the buyer or seller of last resort and will commit his firm’s capital to reestablish an orderly market.
However, the specialist must never use the privileged information contained in his book to step ahead of clients’orders when a match between buy and sell orders comes naturally.
In the past, NYSE specialists have abused their privileged position to take advantage of customers, resulting in a settlement reached with the SEC in early 2004. This also prompted the SEC to consider broad market reforms to align the U.S. regulatory framework with the advance of new trading technologies.
Competition from efficient electronic trading has intensified as well. As a result, the NYSE is proposing a new hybrid market model, which will offer certainty of execution to investors who choose that model or the opportunity for old-fashioned price improvement to others. The exchange is also considering diversifying its product offering.
But, without waiting for these recent developments, the NYSE had progressively modernized its market. Orders are delivered electronically to the NYSE via SuperDot, an order-routing system that delivers orders straight to the trading post and electronically sends post-trade reports to member firms where the orders originated.
NYSE e-Broker is one example of the use of technology in a manual environment. The wireless handheld order-management tool keeps floor brokers in constant contact with their firm’s trading desks and floor office.
Program-trading also regularly represents about 50 percent of volume on the NYSE. Interactive Brokers, a firm that pioneered the use of trading technology, regularly ranks among the top 15 program-trading firms on the exchange.
Anonymous SuperDot (Adot) allows institutional investors to submit orders directly to the NYSE without any participant knowing their identity. The institutions and their sponsoring brokers must set trading limits.
Some orders sent to the NYSE can be auto-executed on the Direct+ platform, which today handles about 10 percent of the exchange’s volume. Direct+ was designed for small retail orders of up 1,099 shares and had some constraints, such as a 30-second mandatory interval between consecutive orders.
The NYSE is now proposing to boost the functionality of Direct+ by lifting all size and interval restrictions to support its hybrid model. This will have a major impact on the market structure at the NYSE and affect not only the specialists and floor brokers but the global financial industry.
Member firms can also trade during four after-hour crossing sessions between 4:15 p.m. and 6:30 p.m. on the Off-Hours Trading Facility (OFHT).
The NYSE electronic market data service includes NYSE OpenBook, a real-time limit order book that displays the aggregate volume for each price for each NYSE security. LiquidityQuote provides a single price for the cumulative number of shares for large orders on the limit order book, with the specialist maintaining the inside quote.
Besides developing a hybrid model, NYSE CEO John Thain has outlined plans to diversify his exchange’s offering. The NYSE, which once traded options, may venture into derivatives and is expected to broaden its existing offering of government and corporate bonds, which trade electronically on its Automated Bond System or ABS platform.
Another innovation for the NYSE may be to extend its trading hours in a bid to facilitate trading for European participants.
NASDAQ just became a stock exchange, a status the pioneer electronic stock market had applied for in 2000 but whose approval has been held up by complex market structure questions and pending regulatory reforms.
An important change would be to extend a revamped trade-through or “best-price” rule to NASDAQ-listed issues, which are currently traded under broker-dealers' best-execution obligation.
Since its modest 1971 debut as NASD’s Automated Quotation system for over-the-counter (OTC) trading, NASDAQ owed much of its development to regulatory changes and to Congress, which supports the right to trade away from organized exchanges.
However, lawmakers and regulators wanted transparency and fair access in the OTC market, which led NASDAQ, over the past three decades, to launch several trading platforms: the Small Order Execution System or SOES, SuperSOES, SelectNet and SuperMontage.
Today, NASDAQ’s high-capacity platform is its Market Center, a seamless environment to trade securities listed on NASDAQ or the New York Stock Exchange. Market Center also is a trading hub for popular exchange-traded funds, such as the QQQQ, that tracks the Nasdaq-100 index, or other ETFs listed on the American Stock Exchange.
The open-model NASDAQ Market Center offers:
- a fully integrated order display as well as trade execution and trade reporting
- the ability for market participants to enter as many orders as they want at multiple price levels
- an automated trade reporting and reconciliation system
- with the acquisition of the Brut ECN in September 2004, NASDAQ also added smart-routing capability
- multiple order types, such as pegged or fill-or-return
- multiple market participant IDs
- Opening Cross and Closing Cross, or electronic auctions that execute all shares for each stock at a single price
- multiple connectivity options, including FIX, private network, CTICI or NASDAQ WorkStation II
One milestone in NASDAQ’s history was the SEC’s Order Handling Rules of 1996 that spurred the growth of the ECNs. To stand up to its technology-savvy, less-regulated rivals, NASDAQ recently adopted some ECN features and slashed fees.
Long before it was called the American Stock Exchange, AMEX was known as the “Curb Market”because trading was conducted by the curb on Broad Street, right by the well-established New York Stock Exchange.
The Curb Market took off with California’s 1849 Gold Rush, handling stocks issued by booming mining companies too young to merit a listing on the NYSE. At times, the Curb attracted some big winners, such as Standard Oil. In 1921, the Curb moved indoors to a building at Trinity Place and changed its name to the American Stock Exchange in 1953.
NASD purchased AMEX in 1998 but transferred control back to The Amex Membership on January 3, 2005, paving the way for the election of a new Board of Governors.
AMEX is one of six U.S. exchanges trading equity options but is best known for its pioneering role in exchange-traded funds, which it launched in 1993 with an ETF based on the main S&P index and known as the Spiders. Today, AMEX lists 144 ETFs.
AMEX is a specialist-manned, floor-based auction market but it is developing more electronic functionality:
- The exchange reported that nearly 75 percent of equity trading is conducted electronically. BARS (Booth Automated Routing System) helps order flow management and directs orders straight to floor brokers’handless devices
- NETS, or New Equity Trading System, is an enhanced specialist display book that provides automated order update and order matching
- In 2004 AMEX launched ANTE (Amex New Trading Environment), an options platform that supports the exchange’s hybrid model, combining electronic trading and the floor-based auction process
- AMEX provides detailed information with its ETF screener, allowing to compare ETFs by issuer, style, expense ratio, net assets, price and total return
- HOLDRS (Holding Company Depositary Receipts) are other relatively new securities listed on AMEX. They are mostly sector-based securities that represent ownership of the common stock or ADR in specific companies in that group. AMEX also offers trading in structured debt products
In January, AMEX Chairman and CEO Salvatore Sodano announced he was retiring. This may usher in a new era for AMEX, including greater automation of some of its product lines, in particular the ETFs—a favorite among arbitrage traders.
A collusion scandal among market-makers in the 1990s prompted the Securities and Exchange Commission to issue the Order Handling Rules in 1996 to protect customers’limit orders and increase transparency in the NASDAQ market.
Electronic communications networks or ECNs quickly became a popular place to display limit orders, posing a strong competition to NASDAQ. That trend gathered momentum in 2001 when decimalization, introduced during the longest stock market downturn since World War II, crushed margins and profits in the market-making business.
Created by former trader Jerry Putnam and built on software maker Townsend Analytics’technology, Archipelago was among the first four ECNs, along with Instinet, which founded the agency brokerage business in 1969, Island and Bloomberg Tradebook.
Unlike well-established Instinet or Island and Tradebook, which enjoyed the support of strong parents, Archipelago had to look hard for liquidity at first. Putnam conceived the “outbound”ECN model: if your order can’t be immediately matched in Archipelago’s book, Archipelago will seek a match elsewhere.
As quasi-exchanges, ECNs espoused the concept of close pools of liquidity. Putnam’s outbound ECN model changed that notion, hence the name of Archipelago, a clever alternative to Island.
In 1998, the SEC issued its Regulation ATS, which, among other topics, discussed the conditions under which an alternative trading system could register as exchange instead of broker-dealer. Eager to collect market data revenue, several ECNs, including Archipelago, filed the initial paperwork but held little hope the SEC would act on it.
Putnam thought of an alternative route: in July 2000, Archipelago partnered with the Pacific Exchange (PCX), which became the self-regulatory organization for the electronic stock market, named ArcaEx. The exchange today operates on a Sun Microsystems Solaris platform that handles trading in equities listed on the New York Stock Exchange and Nasdaq as well as exchange-traded funds (ETFs) listed on the American Stock Exchange.
In January 2005, Archipelago Holdings announced its planned acquisition of PCX Holdings, which would pave the way for ArcaEx to become the first U.S. exchange to trade both equities and options electronically.
Archipelago grew both organically and through acquisitions, completing its merger with Redibook in 2002. The acquisition of Globenet that year also allowed ArcaEx to enter the OTC Bulletin Board arena, which are traded on its ArcaEdge system.
ECNs became a new breed of financial markets intermediaries when the SEC’s Order Handling Rules came into effect in 1997, with the goal of better protecting customers’limit orders and fostering competition in the NASDAQ marketplace. At one point, there were as many as 12 ECNs, but only a handful still exist today and consolidation in that space might not be over yet.
Now known as Inet, Island wrote many pages of the history of the ECNs, largely due to its technology—developed by chief IT architect Josh Levine—and its aggressive stand for market structure reforms, advocated by Island then-President Matthew Andresen.
Island spearheaded the fight against the trade-through rule, highlighting the shortcomings of the floor-based auction system vs. auto-execution electronic systems. Seen as an intellectual oddity at first and met with bitter opposition later, Island’s anti-trade-through fight bore results: it led the SEC to propose major reforms in 2004 to modernize U.S. capital markets with Regulation NMS.
Island was part of the Datek Online Holdings group, which came under regulatory scrutiny and was forced to enter one of the largest settlements ever reached with a single firm. Under a new management led by Ed Nicoll beginning in 1999, Datek capitalized on its strength—technology—and was subsequently sold to Ameritrade for $1.3 billion.
The deal did not include Island, which was eventually bought by Instinet, the founder of the electronic agency brokerage business, in September 2002. Majority-owned by British market data and information services provider Reuters, Instinet merged its own ECN platform with Island’s to create a mega-ECN, Inet. Instinet also separated its brokerage and ECN businesses. Yet, the merger and restructuring failed to yield lofty profits and Reuters has put the Instinet group on the auction block, with a sale likely to be announced soon.
Instinet made its debut in 1969, as Institutional Network Corp., a financial services provider for the buy-side. By allowing other broker-dealers as members in the mid-1980s, Instinet de facto became the central limit order book for the NASDAQ market, more than a decade before the SEC’s Order Handling Rules.
Other ECNs
Brut was launched in May 1998 as the Brass Utility and was acquired by SunGard Data Systems a year later. It later merged with Strike Technologies, another ECN founded by a Wall Street group including Goldman Sachs and Knight Trading. SunGard bought out its partners in 2003, turned Brut into the second-largest ECN and sold it in 2004 to NASDAQ, interested in smart-routing functionality.
Tradebook is fully owned by market data and information services provider Bloomberg. Launched in January 1997 as one of the first four ECNs, it targets the buy-side and provides connectivity to 40 marketplaces around the world. Tradebook combines value-added brokerage services as well as ECN features.
Nextrade was launched in January 1999, filed to become an electronic stock exchange but never captured a substantial market share despite innovations, such as a foray in foreign exchange online trading and the concept of no-expiration options.
Track is a subsidiary of Track Data Securities. It promoted a low-cost, high-rebate model but never captured a substantial market share.
Attain is the ECN subsidiary of Domestic Securities and was heavily promoted Web-based access to its niche but faithful clientele.
Redibook was founded in November 1997 by Spear, Leeds & Kellogg (SLK), adopted an “outbound”model and later attracted investments from Charles Schwab, Fidelity and other large firms. The ECN was acquired in 2002 by ArcaEx.
Globenet, created in 2001, launched Bullet X, the first platform automating the mostly manual OTC bulletin board (OTCBB) market. It was bought in 2002 by ArcaEx, which has leveraged its technology for its ArcaEdge OTCBB platform.
MarketXT, first known as Eclipse Trading, was launched in January 2000 as an after-hour ECN and was acquired by Tradescape soon afterwards. But Tradescape’s takeover by E*Trade in 2002 did not include the ECN, which subsequently shut down.
The Chicago Board Options Exchange was the first U.S. exchange to start trading standardized, listed options on an organized market in 1973. Two years later, CBOE adopted the Nobel Prize-winning Black-Scholes model for pricing options.
A decade later, CBOE, still blazing the innovation trail, launched options on broad-based stock indexes after negotiating exclusive contracts on the S&P 100 Index (OEX) and the S&P 500 Index (SPX). Today, rival options exchanges hope that Standard & Poor’s would not renew exclusive rights to trade those products whenever the current contracts expire.
S&P recently allowed multiple listings of options on the Spiders, the popular exchange-traded fund (ETF) that tracks the S&P 500 index. Without exclusivity on the product, CBOE provided a highly liquid market for the product but faced solid competition from its newest electronic rival, the Boston Options Exchange or BOX.
Although it is the world’s largest floor-based options exchange, the CBOE has long sought to develop trading technology. In 1984, it launched the Retail Automatic Execution System (RAES) to facilitate electronic order execution. A few years later, the exchange introduced EBook, the first electronic customer limit order book for options.
The CBOE’s success spurred competition with the New York Stock Exchange starting to list equity options in 1985. The CBOE also innovated on the product front, launching Long-term Equity AnticiPation Securities in 1990. Known as the LEAPS, these contracts are long-term dated options and give investors more flexibility to manage their portfolios.
The CBOE also introduced sector index trading; FLEX options, which allow investors to create certain specifications on options contracts; and VIX, a market volatility index that gauges investor sentiment and is familiarly known as “fear gauge”or “fear factor.”
CBOE, which had acquired NYSE options trading business in 1997 and continued to experience growth, launched CBOEdirect, a screen-based trading system in 2001. Initially used for extended hours trading, CBOEdirect was an important step toward developing its current Hybrid Trading System that combines the benefits of open outcry and screen-based trading.
CBOE Hybrid made its debut in 2003 with CBOEdirect as its trade engine. Its features include point-and-click execution, streaming quotes for individual market-makers and direct access to the order book.
Capitalizing on the creation of VIX, CBOE launched a new exchange in March 2004, the electronic CBOE Futures Exchange (CFE), which runs on CBOEdirect. The CFE started trading contracts on the VIX but has added other related offerings since.
Trading
in U.S. options was exclusively a floor-based business until then-E*Trade Chairman
Bill Porter thought of creating an auction market for options on an electronic
platform.
Porter hoped to bring to options the benefits that electronic trading had yielded
for stock trading: better transparency, better execution and lower costs, which
result in greater liquidity and tighter spreads.
David Krell and Gary Katz, two former executives of the options division at the New York Stock Exchange, created the ISE as an auction market for options on an electronic platform in 2000. The ISE’s debut contributed to the multiple listing of options, which the floor exchanges were forced to finally consider as the SEC and the Justice Department probed the “gentleman’s agreement”among options exchanges not to compete in equity options.
Enjoying a meteoric rise due to its unique electronic model, the ISE became the largest U.S. options exchange for equity in 2003. The Chicago Board Options Exchange has exclusive listing for index-based options contracts it has licensed.
Throughout its development, the ISE introduced new features, such as ISEspreads or the Sentiment Index (ISEE), which monitors call and put options.
The Boston Options Exchange (BOX), co-founded by the Boston Stock Exchange, the Montreal Exchange and Interactive Brokers Group, began its rollout in February 2004 to become the 6th U.S. options exchange.
BOX, the second U.S. electronic options exchange, has since attracted other investors: Credit Suisse First Boston, JP Morgan, Salomon Smith Barney, UBS Warburg and most recently Citadel Investment.
BOX introduced a unique feature: the price-improvement period or PIP, a three-second auction that allows brokers to improve the price of their orders by at least one penny above the national best bid/offer. It was an important development in options trading, while moves in nickel and dime increments. Although controversial at first, the PIP has led the ISE to propose a similar price-improvement facility.
Another key feature of BOX is that it does not have a specialist system or barrier of entry. Instead, multiple market-makers compete for orders. BOX, which does not offer payment for order flow, has captured a 5 percent market share of U.S. equity options.
Its competing market-maker system helped the young exchange capture a substantial market share in newly launched and multiply listed options on the “Spiders,”the exchange-traded fund (ETF) that tracks the S&P 500 index.
The first U.S. equity exchange was formed in 1790 by merchants who traded War bonds and belonged to the Philadelphia Board of Brokers.
Long before the United States even declared its independence, then-Philadelphia mayor James Hamilton had made provisions in 1746 for the establishment of a stock exchange.
From its debut in the London Coffee House, the Philadelphia Stock Exchange (PHLX) appreciated the importance of trading innovations. Aware of the benefit tied to the information advantage, Philadelphia speculators set up signal relays to quickly get the latest news and rumors from New York, a system that remained in place until the invention of the telegraph in 1846.
From early on as well, investors realized the importance of market data. A stock broker named Samuel Anderson published the first list of stock prices “Price Current of Stocks,”just two years after the PHLX made its debut. The New York Stock and Exchange Board, the ancestor of the Big Board, copied the Philadelphia charter to write its own rules.
In 1870, Philadelphia set up the first U.S. clearing house to settle trades and help delivery and quickly adopted the ticker, when it was created in 1884.
Consolidation was the dominant trend among U.S. exchanges following the market crash of 1929 and World War II. Philadelphia merged with the Baltimore Stock Exchange in 1949 and with the Washington Stock Exchange in 1953.
Technology was another major force affecting markets in the 1970s, which marked NASDAQ’s debut. The PHLX introduced its small order routing and auto-execution system, PACE or Philadelphia Automated Communication and Execution System, in 1975. That same year, Philadelphia entered equity options trading, a market in which the exchange is still an active participant today. In 1982, Philadelphia introduced currency options.
Philadelphia also introduced its Automated Options Market system or AUTOM for electronic delivery and auto-execution for options in 1988.
As competition heats up, Philadelphia is embracing a hybrid model, which combines the benefits of open-outcry and electronic trading. PHLX XL is a new electronic options trading system that seeks to boost liquidity, foster price competition and provides certainty of execution.
The exchange also owns a futures market, the Philadelphia Board of Trade, which recently became active with futures contracts on foreign exchange.
The Pacific Exchange (PCX) often was ahead of its time and, if its history is any harbinger of things to come, there could well be more consolidation in the U.S. trade execution business.
The PCX’s first incarnation was the San Francisco Stock and Bond Exchange, created in 1882. Although the California gold rush was already over by then, mining was booming in the young state and required an organized capital market to finance its development.
Nineteen brokers decided to organize the exchange “to maintain a free and open market where the investor could convert his cash into securities and its securities into cash at will, at a fair and honest price.”
Similarly, the California oil boom prompted the creation of the Los Angeles Oil Exchange in 1899. The two exchanges merged in 1957 to create the Pacific Coast Stock Exchange, the only market with two floors in two cities, San Francisco and Los Angeles. In 1973, the exchange dropped the word “coast”from its name and added options trading to its San Francisco floor in 1976, with a focus on technology issues.
Always eager to embrace changes, the exchange renamed itself the Pacific Exchange in 1997. Two years later, it reorganized into PCX Equities, the first for-profit U.S. stock market.
This paved the way for an innovative partnership with Archipelago Holdings, the parent of one of the first four ECNs. The SEC approved Archipelago as the electronic equity trading facility of the PCX in October 2001, leading to the closure of Los Angeles equity floor and the launch of the all-electronic ArcaEx exchange.
Besides providing regulatory services to ArcaEx, the PCX continued to run its options business but quickly embraced the notion of a hybrid market. To that effect, it built PCX Plus, which allows options market-makers to trade from its floor or remotely.
On January 3, 2005, Archipelago Holdings announced it was acquiring PCX Holdings, with the goal to turn ArcaEx into the first U.S. exchange to offer electronic trading of both equities and options. Archipelago also acquired the PCX’s self-regulatory business, which will make ArcaEx the first ECN to evolve into a full-fledged exchange.
Other regional exchanges have embraced technology to various degrees to chart their future. The Cincinnati Stock Exchange, founded in 1885, closed its floor and went electronic nearly in 1980. It is now known as the National Stock Exchange. The Boston Stock Exchange, launched in 1830, is a founding member of the all-electronic Boston Options Exchange. The Chicago Stock Exchange, formerly set up in 1882, absorbed several of its competitors in St. Louis, Cleveland, Minneapolis and even New Orleans over the years and is embracing auto-execution.
The Chicago Board of Trade, organized by 82 Chicago merchants as a grain cash market in 1848, is the oldest organized futures exchange.
Although experts may argue about the exact birth date of futures trading, the CBOT was already very active during the Civil War—even financing Union regiments—and trading “to-arrive”or forward contracts in agricultural commodities including wheat, corn and oats.
The official birth date of the CBOT may be 1859, when the market was granted a charter by the Illinois legislature to standardize grades of grain traded on the exchange. Futures contracts made their official debut in 1865 when the CBOT introduced standards for margin and delivery.
While the stock market crashed in 1873, futures trading continued to boom, which led to a series of innovations at the CBOT, such as publishing futures prices starting in 1877 and setting up the first clearing organization in 1883.
When the CBOE erected new headquarters to accommodate its expansion in 1885, the building was the first to use electrical lighting. By 1922, the growth in commodity futures trading was such that the U.S. government felt the need to create a regulator, the Grain Futures Administration.
Major CBOT innovations included the creation of a separate exchange to trade options, the Chicago Board Options Exchange (CBOE), in 1973, and diversification into non-commodities contracts: futures on mortgaged-backed securities in 1975 and on U.S. Treasuries in 1977, while options on futures were created in 1982.
The CBOT celebrated its 150th anniversary with the launch of side-by-side trading of open-outcry and electronic trading on its Project A platform in 1998, paving the way for a move toward electronic trading for financial products.
In 2000, the CBOT is incorporated as a not-for-profit non-stock corporation and launches a new trading platform, a/c/e, in a partnership with German derivatives giant Eurex. This will help the exchange further diversify its lines of products, including mini-Dow futures and interest rate swaps and swap options.
Three years later, the CBOT announced it was switching to a new platform, Euronext’s Liffe Connect, which marked the end of its partnership with Eurex. In 2004, the exchange partnered with the Chicago Mercantile Exchange which agreed to clear all CBOT products on a new CME/CBOT Common Clearing Link.
The CBOT is a leading market for contracts based on four groups of products: agricultural commodities; interest rates, including Treasuries and German debt; the Dow Jones Industrial Average index; and gold and silver.
The predecessor of the Chicago Mercantile Exchange, the Chicago Butter and Egg Board, was formed in 1898 and became the CME in 1919 when it broadened the breadth of its offering—one egg and one butter contract at first—to include a wide range of agricultural products. Called the Chicago Produce Exchange in 1874.
Since, the CME has continued to diversify its roster of listings and is now best known worldwide for its financial products, including its flagship Eurodollar contract. Four main categories of products trade on the CME: interest rates, stock indexes, foreign exchange and commodities.
The CME is the largest U.S. futures exchange and continues to transition a wide range of products from its open-outcry pit to its electronic platform, Globex, which made its debut in June 1992.
Globex was initially developed with Reuters and first offered futures and options on futures contracts on major currencies. The benchmark three-month Eurodollar futures and options on futures contracts started trading on the platform in August 1992, followed the next year by equity products, including contracts on the S&P 500 index.
A decade later, the CME introduced Globex’s next generation platform, based on France’s NSC trading system as part of an innovative product swap where the Paris Bourse, now part of Euronext, received the CME’s state-of-the-art clearing system, CLEARING 21. Once orders for products listed on Globex are placed through front-end applications worldwide, they are immediately acknowledged and matched by the trading engine. Trade reports are immediately disseminated to the trading parties, the CME Clearing House, and the market at large. Continuing its tradition of product innovation, the CME launched E-mini S&P 500 futures contracts in 1997, with electronic trading during open outcry hours for the first time. The contract quickly became the exchange’s fastest growing product.
Another success came in 1999 with the E-mini NASDAQ-100 futures, while “side-by-side”electronic and pit trading in Eurodollars started during regular hours. In June 2002, the CME added onto Globex e-miNY crude oil and natural gas futures contracts that clear via the New York Mercantile Exchange clearing house.
A milestone for the Chicago exchanges came in November 2003 when the CME began providing clearing services to the Chicago Board of Trade (CBOT) for commodity, equity and interest rate products. In 2004, the CME became the world’s largest clearing organization for futures.
Further endorsing electronic trading, a special shareholder meeting approved in the spring of 2004 transitioning the front two Eurodollar futures products onto Globex.
The CME regularly upgrades Globex by adding patent-pending functionality, such as the Implied Pricing Functionality for Eurodollars, which allows electronic calendar spread trading for Eurodollar futures. Enhanced options functionality for electronically traded CME Eurodollars facilitates trading of complex combination and spread trades typically used with short-term interest rate options on futures.
The CME is also leveraging its electronic access to become a global exchange, setting up Globex communications hubs in Germany, Ireland, the Netherlands, France, Britain, Gibraltar, Italy and now Singapore. The exchange has developed two Japanese monthly and seasonal CME Weather contracts for the Tokyo and Osaka exchanges, based on the Pacific Rim Index.
The New York Mercantile Exchange (Nymex) made its debut in 1872 as the Butter and Cheese Exchange of New York but did not get its current name until 10 years later when it diversified its contracts to add fruits and poultry.
Founded by a group of dairy merchants who sought better storage and trading for their perishable commodities, Nymex today is the world’s largest physical commodity futures exchange. Nymex has achieved this status in large part due to its energy-related futures, which it launched in 1978 with a heating oil contract.
Success in the commodity futures exchange business does not come easily. It may be hard to believe, but there were more than 1,000 U.S. commodity exchanges in the 19th century, operating mostly as marketplaces where sellers displayed local produces and goods.
But the small exchanges could not long compete against their larger rivals in Chicago and New York, which operated centralized warehouses needed to support trading in physical commodities. The “bazaars”quickly made way for the organized exchanges where contracts can change hands many times before maturation. Physical delivery is fully handled outside the exchange, from specifically designated warehouses.
A crucial step for Nymex was its acquisition of COMEX in 1994. Comex—which first stood for Commodity Exchange—itself resulted from the 1933 fusion of the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange and the New York Hide Exchange.
NYMEX today trades energy products, including electricity, precious and rare metals, copper and aluminum as well as some stock index futures, such as the FTSE Eurotop contracts. Trading is mostly conducted via open-outcry on NYMEX, but the exchange’s futures contracts are electronically available on NYMEX ACCESS, a platform launched in 1993, after the close.
With volatile production and geopolitical conditions, crude oil is the most actively traded commodity in the world and has contributed to NYMEX’s expansion. Britain’s Brent is a light, sweet North Sea crude oil, which is an industry benchmark and trades as a differential to NYMEX bellwether light sweet crude futures contract.
E-miNY futures contracts, which are half the size of a standard crude futures contract, are in great demand among portfolio managers. They are electronically traded on the Chicago Mercantile Exchange’s Globex platform but cleared via NYMEX clearinghouse.
Also in the Big Apple, the New York Board of Trade (NYBOT) is another futures market that resulted from the 1998 merger of smaller markets—the Coffee, Sugar and Cocoa Exchange and the New York Cotton Exchange.
OneChicago was launched in November 2002 as a new exchange for U.S. single-stock futures, a new class of financial instruments whose trading was made possible by the Commodity Futures Modernization Act of 2000 (CFMA).
Single-stock and narrow-index futures were long banned in the U.S. because they involved both securities and futures, which led to a deadlock over who should regulate them, the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). The CFMA ended the deadlock by letting both regulators in charge of oversight.
OneChicago is a joint venture created by the Chicago Mercantile Exchange (CME), the Chicago Board Options Exchange (CBOE) and the Chicago Board of Trade (CBOT). The futures exchange runs on CBOEdirect, the CBOE’s screen-based trading system.
Single-stock futures have failed to attract as much enthusiasm as was once envisioned. OneChicago is the sole U.S. market trading these products today, as its competitor NQLX, itself a joint-venture between NASDAQ and Euronext, shut down its doors in December 2004.
In January 2003, German-Swiss derivatives giant Eurex announced plans to launch a U.S. futures market that would compete against the Chicago Board of Trade—its one-time partner—in the U.S. Treasuries arena.
Launched a year later, Eurex US runs on its proprietary a/c/e platform, which the CBOT abandoned to adopt Euronext’s Liffe Connect.
Eurex US debut has been less smooth than its successful Frankfurt-based parent had hoped for. Obtaining U.S. regulatory approval took longer than expected and a partnership with a number of Wall Street gathered in Exchange Place Holdings, has not resulted in much order flow. The Exchange Place partners were investors in the failed BrokerTec Futures Exchange.
An important part of Eurex US’s strategy was to offer clearing on either side of the Atlantic, another project that was faced with regulatory hurdles. The exchange’s Global Clearing Link started operating in mid-November 2004 and is expected to boost cross-border clearing efficiency.
The Global Clearing Link is also expected to lead to a more efficient use of capital through portfolio margining and the use of a common pool of euro- and dollar-denominated collateral.
Another
destination for customer orders submitted to Interactive Brokers LLC is Timber
Hill, the specialist firm in the Interactive Brokers Group.
Timber Hill was founded in 1982 by options trader and computer expert Thomas
Peterffy. Timber Hill, which traded equity options at the American Stock Exchange,
created the first handheld computers used for trading.
The proprietary technology can track positions and continually re-price options, giving Timber Hill an edge over its peers. Over the past three decades, the firm has continued to innovate and expand. Timber Hill today is the U.S. firm that is a specialist in the largest number of options series. It also is a member of all major exchanges around the world.
Discovered in 1497 by John Cabot on an expedition sponsored by England’s King Henry VII, Canada caught the attention of French King Francois I who dispatched explorer Jacques Cartier there in 1534. This was only the first chapter in a long rivalry over Canada between the two European powers.
Canada has retained this dual cultural heritage, present today in its markets in Toronto and Montreal.
The Bourse de Montreal traces its roots back to 1832, when brokers regularly met at the Exchange Coffee House and formed an association, which took the name of Montreal Stock Exchange in 1874. After World War I, another informal market for shares in emerging companies is created near the exchange in 1926 and was named the Curb Market, after the American Stock Exchange. In 1953, the Curb Market becomes the Canadian Stock Exchange and merges with the bourse in Montreal two decades later.
After launching equity options and other derivatives products, the new exchange changes its name to simply the Montreal Exchange, which starts adopting electronic trading in 1990. Ten years later, the exchange demutualized, paving the way for ambitious projects, such as the creation of the Boston Options Exchange on an open, flat model without specialists or payment for order flow and with a price improvement feature.
In Toronto, the stock exchange existed in 1852, created in 1878 with 12 stocks.
Like Montreal, it adopted electronic trading in 1977, the Computer Assisted
Trading System and creates the TSE 300 Composite.
It is fully electronic since 1997.
Created in September 2000 by the merger of the Amsterdam, Brussels and Paris markets, Euronext is one of the world’s newest exchanges and the first pan-European exchange. Its 2002 acquisition of the London International Financial Futures and Options Exchange (LIFFE) signaled the direction that other exchanges may follow: cross-border markets with multiple products seamlessly traded on a single platform.
In 2004 Euronext completed the integration of all its markets—including the Lisbon bourse that was acquired in 2001—and may be ready for another acquisition: the prestigious London Stock Exchange (LSE).
Mergers between exchanges in different countries raise many challenges. But an important piece of the puzzle in a possible Euronext-LSE merger is already in place. LCH.Clearnet, which resulted from the 2003 merger of Euronext’s Clearnet and the London Clearing House (LCH), already clears products for both Euronext and the LSE.
Euronext has created a single market for cash products by making all its listed stocks available on a single trading platform, NSC, and clearing through a single system. Euronext.liffe achieved a similar model for derivatives, by bringing all its derivatives products on a single electronic trading platform, LIFFE CONNECT.
Such ground-breaking innovations are nothing new for the exchanges that are now part of Euronext, as they contributed to the development of capital markets six centuries ago.
Euronext Amsterdam
Amsterdam became an important financial center soon after seven Dutch provinces
united and declared independence from Spain in 1579.
A goods and financial exchange, the Amsterdam Bourse brought a number of innovations, such as the listing of insurance policies covering risky ocean trade, which was expanding to the far shores of the New World. Banking, no longer dominated by the Italians who had suffered several bankruptcies, flourished in Amsterdam in tandem with the stock exchange.
Another innovation was the foundation of the Dutch East India Company or VOC in 1602 and the first organized issuance of shares by a company. For this reason, Amsterdam is regarded as the first true equities exchange, in contrast with its predecessors that traded various securities. Investors’ appetite for the VOC shares pushed the stock up 12 fold and helped create options and futures on the coveted stock, thus laying the foundation for Amsterdam as a derivatives market.
Amsterdam’s trading success also brought the first major market bubble with the famed “tulip mania” of 1634 and its ensuing crash in 1637.
In modern times, the Amsterdam Stock Exchange Association was founded in 1851 to regulate stock trading. It required membership to trade on its floor. In 1997, the Association abandoned its membership model and merged with the European Options Exchange, launched in 1978 to emulate the Chicago Board Options Exchange.
The new company, Amsterdam Exchanges, operated both equity and derivatives markets and consolidated clearing, settlement and depository services. The new structure paved the way for the Euronext merger.
Euronext Brussels
Belgium was the cradle of the first securities markets, starting with Bruges,
due to Flanders’ prominent role in international trading in the Middle Ages.
The Antwerp Stock Exchange was the world’s first building specifically erected
to house securities trading in 1531.
Over the centuries, Belgium’s financial center moved to Brussels after Napoleon, who had conquered France’s northern neighbor, issued a decree creating the Bourse de Fonds Publics de Bruxelles in 1801.
Although Belgium gained its independence in 1831, the country’s financial system retained the French model: brokers were officials controlling government securities trading and could not engage in proprietary trading. Belgium’s financial industry was deregulated in 1867 and another milestone was achieved a century later with the Financial Transactions and Markets Act of 1990 to modernize the country’s capital markets.
In 1999, a royal decree created the Brussels Exchanges (BXS), a corporation operating the Bourse de Bruxelles, the Belgian Futures and Options Exchange or Belfox, and the central securities depository or CIK. It was a crucial step toward the Euronext merger a year later.
Euronext.liffe
The lifting of foreign exchange controls in Britain led to the creation of
the London International Financial Futures and Options Exchange (LIFFE) in
1982 to help investors manage currency and interest rate volatility.
Through the acquisition of the London Traded Options Market (LTOM) in 1992 and of the London Commodity Exchange (LCE) in 1996, LIFFE added equity derivatives and commodities. A pit-based exchange, LIFFE started developing electronic trading in 1998 but it was too late to stem the onslaught of its young virtual competitor, Eurex, which snatched trading in flagship German bund contracts away from London.
By June 2000, the derivatives exchange was trading all its products on the LIFFE CONNECT platform. It changed its corporate structure to become a for-profit entity. Euronext bought the derivatives market in 2002.
Euronext Lisbon
A European seaborne power along with Spain, Portugal’s involvement in the conquest
of the New World was limited by its small population of just one million at
the beginning of the Renaissance.
Nevertheless, Portugal was geared toward international trade and a group of local merchants, the Businessmen’s Assembly, created the Lisbon Exchange in 1769. The Porto Stock Exchange followed nearly a century later.
In 1992, the Lisbon Stock Exchange Association and the Porto Stock Exchange Association were organized as non-profit institutions, with cash transactions handled by Lisbon and derivatives by Porto. They merged in 1999 and were acquired by Euronext in 2002.
Euronext Paris
Before the Dutch East India Company started issuing shares, there had been
several attempts at raising funds to finance business development throughout
Europe.
One early example was the Societe des Moulins du Bazacle [Bazacle Mills Co.] that floated 96 shares in 1250 in Toulouse, France. The stock remained quoted under another name until 1946.
Emulating trade centers in Bruges and Antwerp, Lyons created the first French bourse in 1540. The French were eager to regulate securities trading early on, with a royal edict governing financial intermediaries being issued in 1572. But Paris, the capital, did not have a bourse until 1684, highlighting Frenchmen’s traditional distrust for financial instruments.
John Law, a Scottish adviser to the King, confirmed their worst fears when he introduced paper money issued by the Banque Royale in 1716 and floated shares in the Compagnie des Indes—two experiments that ended in bankruptcies and gave “bank” a bad name in France.
Paris’ first stock exchange was created in 1724 but the French financial system remained anemic until Napoleon created a central bank, issued banknotes, regulated brokers and opened a new Paris Bourse in 1801. Always eager to clearly assign duties, the French can be credited for inventing the upstairs market and the over-the-counter market, nicknamed the “wet feet” because its brokers convened in open air, no matter the weather.
Paris moved into derivatives in 1986 with the MATIF bond futures market and the MONEP equity options exchange. All French markets, which had joined the electronic trading revolution early on, merged in 1999 as ParisBourse. The next year, the new company merged with the Amsterdam and Brussels bourses to create Euronext, which went public the following year.
The Royal Exchange, the first securities market in London, dates back to 1566 when it was created to compete with Amsterdam.
In 1698, rowdy brokers—mostly “jobbers” or speculative traders—were expelled from the Royal Exchange, which inspired Jonathan Castaing to issue a list of securities and commodities prices, “The Course of the Exchange,” to lure that clientele to his coffee shop on Exchange Alley.
The “jobbers” were particularly active in shares of the South Sea Company, a speculative bubble that burst at about the same time as John Law’s Mississippi Bubble in France in the early 1720s.
Yet, the clientele remained faithful to Castaing’s and set up a brokers’ club there in 1761. The crowd grew so big that, eight years later, the brokers moved to their own building, complete with its own coffee house. The grouping took the name of “Stock Exchange” in 1773, introduced membership to the “Stock Subscription Room” in 1801, and wrote a rulebook in 1812.
London owed its rise to prominence as a European market center to the closure of the bourse in Paris during the Revolution and the occupation of Amsterdam by the French. The industrial revolution, in particular the railway mania of the 1840s, presided over London’s good fortunes.
Increasing trade within the British Empire, as well as technology advances such as the telephone and telegraph, further contributed to London’s expansion in the 19th century as an international market. The two world wars of the 20th century diminished London’s global prestige, while Wall Street and Tokyo grew in importance.
In 1986, the “Big Bang” deregulation set the stage for the modernization of trading, including electronic trading. The new structure was renamed the London Stock Exchange in 1991 and later launched the emerging-market AIM, the SETS trading system, and the CREST settlement service. In 2000, shareholders voted to incorporate London Stock Exchange plc (LSE) as a limited company, which listed on its own Main Market the following year.
In 2003, the LSE creates EDX London, a new international equity derivatives business, in partnership with OM Group.
One of the world’s oldest equity market, the LSE is about to reinvent itself as it mulls a merger, possibly with Euronext N.V. The LSE said in March it “remains willing to continue discussions with Euronext.” It is the second time in five years the LSE is considering a merger with one of its European rivals.
The Frankfurt Stock Exchange or Frankfurter Wertpapierborse (FWB) finds its roots in medieval trade fairs. Already in the 14th century, Frankfurt was a main trading center of Europe where merchants using different currencies eagerly swapped bills of exchange.
By 1585, there was an organized market to set exchange rates and trade bills. By 1605, Frankfurt merchants used the word “borse” in their trading documents—proof of Bruges’ influence in emerging capital markets—while exchange rates were regularly published beginning in 1625 and rules were introduced in 1682. Soon, trading was so active that merchants could no longer meet in public places and moved to the Braunfels building.
Under the umbrella of the Chamber of Commerce, the Frankfurt Stock Exchange became a public-sector utility in 1808, trading mostly government bonds. It grew as a major financial center with the help of Bank Rothschild in the 19th century.
But Germany’s defeat to France and its Allies in World War I and the payment of a huge war “reparation” debt led to hyper-inflation, destroying the county’s economy and markets. World War II was another severe blow to German markets but the Frankfurt Stock Exchange regained its role as Germany’s main exchange in the 1950s and built its strength through innovations.
Deutsche Borse AG, the new company running the exchange, was formed in 1993 and launched the Xetra electronic trading system in 1997. After a failed attempt to buy the London Stock Exchange, Deutsche Borse went public in February 2001. Its subsidiary Clearstream provides clearing and settlement services.
Deutsche Borse’s best success story might be Eurex, the world’s largest derivatives market, which it co-owns with the SWX Group.
In 1997, Deutsche Borse and SWX Swiss Exchange agreed to merge their respective derivatives subsidiaries, DTB (German Futures and Options Exchange) and SOFFEX (Swiss Options and Financial Futures Exchange) and move their operations to a new electronic trading and clearing platform.
The success of Eurex’s electronic format was dazzling. By 1999, Eurex had vaulted to the top position among the world’s derivatives exchanges, snatching trading in highly liquid German bund futures away from the London International Financial Futures and Options Exchange (LIFFE). The following year, Eurex Clearing AG, the world’s largest clearing house, became the first market to offer remote electronic clearing.
Eurex rapidly expanded its line of products and started developing transatlantic ambitions. In March 1998, Eurex announced an alliance with the Chicago Board of Trade (CBOT). In Europe, a similar alliance was formed with HEX, the Finnish exchange.
The CBOT alliance ended sooner than anticipated, when the Chicago exchange announced in 2002 that it was ditching Eurex’s a/c/e/ platform for functionality-loaded LIFFE CONNECT.
In a counter move, Eurex partnered with the Clearing Corp. in the United States to create Global Clearing Link. Eurex US was launched in February 2004 but its take-off has been slower than expected.
Switzerland, where banking prospered, developed stock exchanges much later than other European countries, with Zurich becoming a market center in the 19th century.
However, brokers associations long predated the creation of organized exchanges. The Zurich “Sensale” Ordinance of 1663 provided some control over “sensale,” an association of merchants and financial intermediaries.
The system remained essentially in place until 1848, when a new federal constitution took effect in Switzerland. The need for an organized market was becoming increasingly pressing, given the competition among European exchanges. For instance, Geneva already had an exchange since 1850.
At first, trading in Zurich was held only on Fridays beginning in 1855, hence the name of “Freitagsborse,” or Friday bourse. The plan to build an exchange in Zurich, tentatively called the “Committee for the Official Bills of Exchange and Securities Quote List of Zurich,” was drafted in 1873.
Four years later, the Zurich Stock Exchange Association made its debut. Its development was hampered by a quarrel between the local authorities who wanted to tax trading and the brokers who brought trading to a standstill with a protracted strike. The Zurich market got a boost when banks were admitted as members in 1896 but faced some hectic times due to speculation in Swiss railroad stocks. In the 1930s, Germany’s financial crisis as a consequence of World War I, the collapse of a major bank and the devaluation of the British pound were all events that rocked the Zurich bourse.
Zurich became Europe’s largest warrant market in the 1990s, closed its floor and pioneered trading technology with the goal of becoming an international marketplace. Since 2002, SWX Group, wholly-owned by the Association SWX Swiss Exchange, is the holding company for the renamed SWX Swiss Exchange and other subsidiaries, including virt-x, a pan-European electronic stock exchange.
Its major “coup” is its partnership with Deutsche Borse in Eurex, the world’s largest derivatives exchange.
Although Italian bankers played a crucial role in the birth of exchanges, Italy did not develop its own capital markets until much later.
After annexing most of northern Italy, the French Emperor Napoleon created the Milan Stock Exchange in 1808, using the same regulatory framework that he had drafted for the French market.
At first, the Milan exchange traded securities and commodities and did not get its first corporate listing—a railroad company—until 1859. Other regional exchanges flourished throughout Italy, which became a unified nation in 1861.
Genoa, a major port, was the main Italian financial market in the 19th century, but Milan took the lead after World War I. The fascist regime imposed a tight control on the economy and stifled capital markets.
It was not until the 1980s that Italian markets got a boost from the introduction of mutual funds. Milan firmly established itself as the leading Italian market with 99 percent of overall volume, although nine other regional exchanges struggled to survive for as long as the open-outcry auction system lasted.
But broad market reforms ushered in a national computerized order-driven trading system in 1991 and Italy’s privatization program in the late 1990s paved the way for modern equity markets.
To manage this new challenge, the Milan Stock Exchange privatized and became the Borsa Italiana Group, launched in 1998 to run and regulate trading as well as oversee corporate disclosure. To attract liquidity, Borsa Italiana introduced remote membership, which has allowed about 130 domestic and foreign brokers to participate in Italian markets.
Borsa Italian regulates and manages the stock exchange market, along with the Italian equity derivatives market (IDEM) and the Italian interest rate derivatives market (MIF).
BIt Systems, the technology arm of Borsa Italiana, provides the IT infrastructure for the exchange and offers trading services to the financial community. Cassa di Compensazione e Garanzia or CC&G acts as central counterparty and Monte Titoli is the Italian Central Securities Depository and Settlement whose operations are highly automated.
The
first exchanges in Spain were commodities markets known as Lonjas.
Although Spain did not have a stock market then, it was a Spaniard, Jose de
la Vega, who wrote the first book on exchange trading, called “Confusion de
Confusions,” in 1688 in Amsterdam.
It was not until 1831 that the King of Spain created the first Madrid Stock Exchange. Although other regional bourses emerged, Spanish capital markets did not flourish until the later part of the 20th century after the death of General Franco.
Spain adopted a new constitution in 1978, which created a more favorable framework
for investments. In July 1989, the Spanish Securities Market Act took effect,
paving the way for broad reforms.
Open-outcry was abandoned in 1995, with the four exchanges in Madrid, Barcelona,
Bilbao and Valencia trading on the same electronic platform.
In 2003, Bolsas y Mercados Espanoles or BME Group integrated the four bourses, as well as MF Mercados Financieros or MEFF, Iberclear and BME Consulting.
As the owner of the Stockholm Stock Exchange, OMX could initially trace its roots to 1863. With its recent acquisition of the Copenhagen Stock Exchange (CSE), OMX can now go further back in time. The Danish exchange was built in 1619 and is today the world’s oldest surviving exchange building.
Its spire is formed by the entwined tails of three dragons representing Denmark, Norway and Sweden—a fitting symbol for OMX, the global IT firm that operates six Nordic and Baltic markets.
OMX resulted from the 2003 merger of OM’s Stockholm Stock Exchange and HEX, which owned the exchanges of Finland, Estonia and Latvia. The new company took the name of OMX and soon went public. OMX has since acquired the Lithuanian exchange and the CSE, with the Polish market now said to be a potential target.
The Swedish group is a partner in the NOREX alliance, formed in 1999 between the exchanges in Copenhagen and Stockholm as the first cross-border market supported by a single platform, OM’s SAXESS, with uniform rules.
Today, there are eight members in the NOREX alliance: the six OMX exchanges plus Norway’s Oslo Bors and the Iceland Stock Exchange. All NOREX alliance exchanges trade on SAXESS.
OM’s strategy has always been bold: the company made headlines in 2000 when it bid for the London Stock Exchange to counter Deutsche Borse’s offer. Neither won, but OM pursued its vision of a deep Nordic-Baltic pool of liquidity, whose capitalization rivals the one of the stock exchanges in Switzerland, Italy and Spain combined.
In 1878, the Japanese authorities issued the Stock Exchange Ordinance, which led to the creation of the Tokyo Stock Exchange (TSE) to trade government bonds and precious metals. Other cities followed suit and Japan had 11 stock exchanges by the time World War II broke out.
During the war, the Japan Securities Exchange Law was passed to reorganize the ailing financial system and the 11 exchanges were merged into the Japan Securities Exchange, which was halted in 1945.
New securities legislation in 1948 paved the way for the creation of several stock exchanges: Fukuoka, Hiroshima, Kobe, Kyoto, Nagoya, Niigata, Osaka and Tokyo and finally Sapporo in 1950. While several of them eventually consolidated, the TSE emerged as the leader.
The TSE started listing government bonds in 1966 for the first time since World War II and convertible bonds in 1970. In the 1980s, the exchange introduced the Computer-assisted Order Routing & Execution System or CORES, and in the 1990s, the Floor Order Routing and Execution System or FORES.
The Tokyo Stock Exchange became the world’s largest market by capitalization in 1988. But the dramatic market correction of the 1990s and the protracted recovery of the Japanese banking system has since confined it to the number-three spot.
The TSE added the “MOTHERS” market for high-growth companies in 1999, absorbed the Hiroshima and Niigata exchanges and demutualized in 2001.
The Osaka Stock Exchange (OSE) is Japan’s second-largest market and an important marketplace for equity index options and futures contracts.
While stock trading was conducted in China in the 19th century, the first equity exchange was created in Shanghai in 1881 and quickly rose to regional prominence. It remained Asia’s largest stock exchange until 1941, when it was closed down as the result of Japan’s invasion.
In the aftermath of Chairman Mao Tse Tong’s draconian communist regime, the Constitution of 1982 put the world’s largest nation on the path to economic expansion. Under the umbrella of China Securities Regulatory Commission (CSRC), the Shanghai Stock Exchange (SSE) and the Shenzhen Exchange were launched in 1990 as not-for-profit membership institutions.
Shanghai, which seeks to regain its top spot among the world’s leading markets, offers a trading system that can handle 8,000 transactions per second on a strict price-time priority basis and perform electronic market surveillance as well. China Securities Central Clearing clears transactions on a T+1 settlement basis.
Orders are entered electronically on the SSE, either on its huge floor or from remote locations. Shanghai broadcast real-time quotes and transaction information via a satellite network that reaches 5,000 trading stations in China and abroad, a system inspired by NASDAQ. Also, the National Electronic Trading System (NET) trades shares of state-owned enterprises and government bonds.
Wanting to emulate the success of the Shanghai market, the Association of Stockbrokers in Hong Kong organized the British colony’s first exchange in 1891. It was renamed the Hong Kong Stock Exchange in 1914.
A rival exchange, the Hong Kong Stockbrokers’ Association made its debut in 1921. The two merged into the Hong Kong Stock Exchange in 1947. Rapid growth of the Hong Kong economy led to the creation of new competitors: the Far East Exchange in 1969; the Kam Ngan Stock Exchange in 1971; and the Kowloon Stock Exchange in 1972. In 1976, another market emerged: the Hong Kong Futures Exchange, specialized in futures and options contracts.
The four equity markets eventually merged into the Stock Exchange of Hong Kong in April 1986.
On July 1, 1997, Hong Kong reverted to Chinese sovereignty, ending 156 years of British colonial rule. As Hong Kong Special Administrative Region of China, the city retained the ability to develop its economy and markets. In March 2000, under the impetus of market reforms, the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange demutualized and merged with Hong Kong Securities Clearing Co. into a single holding company, Hong Kong Exchanges and Clearing Ltd or HKEx, which went public three months later. Other HKEx subsidiaries are HKFE Clearing Corp. and SEHK Options Clearing House.
Hong Kong ranks among the top-10 exchanges in the world, based on total market capitalization.
Overseeing the Malacca Straits, one of busiest shipping lanes in the world, Singapore developed as a major harbor and trading center shortly after it was founded by Sir Thomas Stamford Raffles in 1819. Singapore became an independent city-state in 1965, breaking away from the Federation of Malaya.
Given its strategic economic role, it was no surprise that Singapore became a derivatives market center in 1984, with the creation of Singapore International Monetary Exchange or SIMEX. Globalization was in the cards from the start, as SIMEX simultaneously launched an industry first: a mutual offset trading link with the Chicago Mercantile Exchange (CME).
SIMEX, however, was not the city’s first marketplace. The Stock Exchange of Singapore (SES) started trading equities in May 1973 under the umbrella of the Monetary Authority of Singapore.
But SIMEX developed faster than its predecessor largely due to a series of innovations, including launching the Nikkei 225 futures—the first futures contract on a Japanese stock index. The two institutions merged in December 1999 into SGX, which demutualized into a for-profit corporation.
SGX ETS (Electronic Trading System) provides global trading access to its markets where 80 percent of the customers are from outside Singapore.
In the mid-1960s, Sydney was the world’s leading market for greasy wool futures. It became the Sydney Futures Exchange (SFE) in 1972, as the market expanded the list of its futures contracts to include cattle contracts, gold, 90-day bank bills, cash-settled dollar contracts, bonds and many others into the 1980s.
In 1989, the SFE became the world’s first exchange to introduce a screen-based trading system, SYCOM, for after-hours trading. It acquired the business of the New Zealand Futures and Options Exchange in 1992. In 1994 the SFE launched Individual Shares Futures and by mid-1995 listed ten share futures contracts.
The following year, the SFE set up a link with the New York Mercantile Exchange
(Nymex) via SYCOM, which allowed SFE members to trade Nymex’s energy products,
including the West Texas Intermediate crude oil contract. The alliance ended
in 2004.
In 2000, the SFE demutualized and merged with Austraclear. The new corporation,
SFE Corp., went public in 2002. The second-largest derivatives exchange in
the Asia-Pacific region, the SFE trades options and futures on interest rates,
equities, currencies and commodities.