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Business

Stock exchanges fight to remain significant

With Deutsche Börse and the NYSE Euronext set to merge, other stock exchanges are looking to forge similar alliances to stay competitive. But the real threat is not in Frankfurt or New York. It's on the Internet.

Traders yelling ion the floor of the New York Stock Exchange

Hectic floor trading may soon be a thing of the past

If approved by regulatory authorities, the merger between the Frankfurt and New York stock exchanges would create - in terms of revenue - the biggest trading system yet. Pressure has thus increased on other stock markets to get bigger and leaner as competition heats up.

It's a small surprise, then, that the Singapore Exchange is looking to buy its Australian counterpart, and that the London and Toronto stock exchanges announced an all-stock merger that would form the largest market for mining and natural resource stocks.

NYSE's trading floor

Even exchange-based trading is becoming increasingly computerized

But however large and powerful these mega-stock exchanges may be, they all face the same problem: They are not needed anymore.

The image of brokers shouting hectically across the floor and moving millions at a wink is outdated: Any type of stock can be traded on virtual floors, or "over the counter," as off-exchange trading is called.

Trading stocks without stock exchanges

For several years now, many large corporations have done their trading on electronic "multilateral trading facilities", such as Chi-X and Turquoise, rather than at traditional stock exchanges.

Chi-X was founded in 2007 by Japanese company Nomura Holdings. Its majority stakes are held by major banks like Goldman-Sachs and Merrill Lynch. Turquoise opened one year later with the support of nine investment banks, including Deutsche Bank.

Their clients have found over-the-counter trading, or OTC trading, to be cheaper, faster, and more flexible than traditional exchanges.

Nobody is bound to business hours – trading runs into the night, and some platforms are even active on the weekends. And neither clients nor brokers have to maintain offices in major financial centers to be near an exchange – commercial property doesn't come cheap in cities like Tokyo, Frankfurt, and New York.

Share price graph

Traditional stock exchanges are losing business to over-the-counter trading platforms

New-found freedom

On the Internet, anybody and everybody can buy and sell fast and from any given location, rendering traders on the floor superfluous. Online traders usually work at fixed prices, while fees at traditional stock exchanges depend on trading volumes, with large trading volumes leading to considerable costs.

Another advantage of OTC-trading is price determination: In online-trading, a buyer is guaranteed a price for a given product within seconds, speeding up the order confirmation, and enabling the customer to see right away how high the profit is. The OTC trading environment is also less restrictive. Even high-risk stocks which are not allowed at traditional stock exchanges may be traded online.

Going down together rather than alone

The trend in stock broking clearly seems to be a move away from the traditional stock exchanges and the business on the floor and to online trading platforms operating almost without bounds or barriers.

Chi-X, for instance, increased its revenue in European trading by 83 percent in 2010, according to Börse.ARD.de, a German public media portal devoted to finance and trading. With a turnover of 1.6 trillion euros, Chi-X outdid Deutsche Börse, which saw 1.24 trillion euros cross the trading floor in Frankfurt and its own electronic platform, Xetra.

Given the growing market-shares of OTC-trading platforms, the merger of the New York and Frankfurt stock exchanges assumes a different meaning:This merger is not about two giants merging to dominate the market. Rather, it's about two stock exchanges struggling jointly to avoid sliding into insignificance.

Autor: Dirk Kaufmann / ar
Redaktion: Sam Edmonds

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