Demutualization and Public Offerings of Financial Exchanges

Abstract

Almost all exchanges around the world were member-owned, organized as non-profit, mutual organizations, until the early 1990s. However, the last 10 years have seen a dramatic change in the organizational structure of exchanges as they have demutualized and evolved into for-profit entities usually owned by investors rather than just members. This demutualization process is frequently accompanied by a public listing of shares allowing for wide spread ownership. These are major changes for a sector that plays a critical role in the financial markets and the capital raising process. We argue that these changes are being driven by technological, regulatory and industry specific factors and should have wide ranging consequences both for the exchanges as well as market participants. We find that demutualized exchanges have performed well both in terms of returns to shareholders and operating performance. However, demutualization is a relatively recent phenomenon with limited history and therefore the results must be interpreted cautiously.