Recent Developments in the Market for Markets for Financial Instruments

Abstract

Some of the most far-reaching changes in the financial markets currently occur in the structure of the market for markets for financial instruments itself. This article first highlights some of the most prominent recent evidence. In the subsequent analysis, demand side, supply side, and governance aspects are dealt with. On the demand side, banks and security houses may currently be in a powerful position due to their role as switchmen with respect to order routing. However, investors, institutional as well as individual, are empowered at the expense of access intermediaries as opener, i.e., less intermediated, trading platforms become more realistic. On the supply side, the interplay of IT, regulation, and the tremendous growth in market volume increased the competitiveness in the market for markets significantly, in particular by lowering market entry barriers. The governance analysis claims that, until now, traditional exchanges and their emerging competitors differ not that much as one might think at first sight. Almost all of them are still member and customer controlled entities (MCCEs). However, since increasing competition unevenly affects the parties connected to an MCCE, power shifts can be observed. Significant steps towards an outside owned and controlled entity (OOCE) are still very rare. Such steps would include trading platform suppliers going public with a substantial free float. In summary, we seem to be at the beginning of the transformation of the market for markets to a much more competitive sector, which, until now, only has affected a few trading objects. Seen this way, for the future we should expect the emergence of a deeply differentiated range of products and services in response to the great diversity of preferences among the customers.