Latin American Capital Markets

272 ROBERTA S. KARMELity (IOSCO 2000).The desirability of exchange expansion into new businesses needsto be carefully considered from a conflict of interest perspective.Drivers for DemutualizationCompetition from other exchanges—including nontraditional trading markets, such aselectronic communications networks (ECNs) and alternative trading systems (ATSs)—constitutes the primary driver for demutualization. Competition has put pressure ontrading profits at a time when trading volumes have increased, but technology hasmade trading more efficient. In order to compete with ECNs, traditional exchangeshave had to better align their governance and business strategies to satisfy institutionaland retail customers rather than the short-term interests of their members. In LatinAmerica, bank members of stock exchanges are important providers of finance, andthey wish to maintain this role. It has been asserted that outsider-owned, as opposedto member-owned, exchanges are more efficient as members' business interests becomemore diverse and as exchanges face more competition (Hart and Moore 1996).In addition to the competitive pressure to become more efficient and customerfocused, the move from floor trading to electronic trading requires significantcapital. It also changes the value of exchange memberships.There is no longer a physicalneed to limit the number of exchange members, and it is in the interest ofexchanges to place their trading terminals in as many places as possible. Once customershave direct access to screens, exchange memberships have diminished economicvalue. Demutualization can buy out the vested interests of traders, shift powerto other firms, and at the same time raise capital for modernization of trading. Howeventhese generalizations need some qualification.The National Association of SecurityDealers (NASD) has never had a trading floor; but its subsidiary, NASDAQ, hasdemutualized.The New York Stock Exchange (NYSE) continues to have one, and itmay demutualize in the future.Another important driver for demutualization has been globalization and theperceived need of exchanges to affiliate with exchanges in other countries in orderto survive. This has been a particularly important factor in Europe. The advent of acommon currency and the European Central Bank have led many observers to believethat there are too many exchanges in Europe and that some consolidation willoccur 2 Elsewhere, smaller exchanges have consolidated on a national level; mergersCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub'• "The Battle of the Bourses," The Economist, May 5,2001, p. 517.