Building a Global Exchange v3.0
- 1. 30-May-2007 Building a global exchange Thomas Roughan, Managing Principal, Capco and Jeni Incontro, Consultant, Capco Introduction Survey says: “70 Percent of Wealthy Investors Look Abroad”…E-Trade launches international trading…NYSE and Euronext to combine…China decline triggers fall in global markets…NASD and OMX to combine… There’s been a lot happening in the global investment space lately. Ten years ago it would have been hard to believe that a drop in the Shanghai exchange would trigger a global sell-off, or that national champions such as the NYSE and NASD would be looking for merger partners in Europe. Global Growth However, since the fall of the Berlin Wall in 1989 the world of stock exchanges has changed dramatically. In order to understand the growth in the number of stock exchanges world-wide, we performed a top-down analysis at the country level.1 The International Standards Organization (ISO) demarcates the planet into 244 countries / territories. The World Bank has population and economic figures for 209 of them. In 1988, stock exchanges existed in 63, or 26% of these countries. These countries comprised 58% of global population and 81% of global GDP (PPP basis). Once the Wall fell in 1989 however, exchanges started to blossom everywhere. Number of Countries with Stock Exchange 0 2 4 6 8 10 12 1585 1792 1808 1850 1861 1869 1875 1881 1890 1894 1912 1929 1953 1960 1969 1975 1981 1986 1990 1993 1996 1999 2002 2005 Year #New 0 20 40 60 80 100 120 140 160 #Cumulative # New # Cumulative By 2005, there were national or regional stock exchanges present in 145, or 59% of ISO countries, which together comprised 92% of the world’s population and 99% of global GDP (PPP basis). Looking ahead, Libya, Cambodia, Sierra Leone and Gibraltar have all announced plans to develop exchanges in the next two years. The remaining 95 ISO countries constitute roughly only 1% of global GDP. There are 65 countries with population counts which range from approximately 20,000 in Palau to 73 million in Ethiopia. The bulk of these, approximately 50 countries, have populations under 10 million. The remaining 30 countries are small islands with limited or no population. In summary, institutional and legal frameworks and infrastructure for stock trading have been established in virtually all of the world’s significant economies at this point. 1 As well as stock exchanges, there has also been high growth in the number of fixed income and derivatives exchanges. For the purposes of this study, fixed income and derivative only exchanges were excluded. Many of the stock exchanges included in the study list and trade multiple instrument types, but all trade common shares at a minimum.
- 2. Opportunities for Exchange Operators The rise in the number of stock exchanges around the planet offers exchange operators opportunities to expand early in promising new markets. The benefits they could bring these new exchanges are numerous: increased visibility to investors, mature and secure trading infrastructures and regulatory standardization. However, depending on the appetites of local officials, they could be stymied in their attempts to buy in. Many may not want to sell at all. As well, for the exchange operators, there will likely be competition among themselves for the promising exchanges that are available. Over time, however, it seems likely that the independent exchanges will consolidate down into a small number of major players, likely regionally focused, with some remaining independents, both large and small in size. Opportunities for Investors While all this activity is good news for exchange operators, the real question is it good news for international investors? While some exchanges, such as China and Russia, have been booming recently, many of the other new exchanges are still in their infancy, with limited listings, trading volume and scattered restrictions on foreign investment. The attractiveness of these exchanges for investment by the average retail investor is muted. For international institutional investors, the same caveats apply, but institutional investors have the resources and marketing incentive to analyze these markets in detail to determine which are investable. Of course, the development of these markets will depend on the local environment and the appetite for local issuers, investors and institutions to utilize and grow the existing exchange market. The most promising of these can then be added to the investment list for SMA, mutual fund, index fund and ETF products for retail and institutional clients. As the economies grow and mature over time, more countries should migrate onto this list. Hedge funds, ever in search of the next alpha opportunity, will be especially keen to be the first players in. Hopefully these new markets will be successful, for in the years ahead international diversification will be a key component to achieving the returns needed to fund investors’ retirement plans in the developed world. As an example, according to long term research performed by the London Business School in 2005, the U.S. has only been the number 4 performer since 1900; South Africa, Australia and Sweden have all had better returns. More recently, other countries as well have outpaced the U.S. Institutional investors have long allocated a slice of their overall portfolio to international, but the retail and HNW investor segments are now taking significant interest as well as information on returns in this asset class becomes more widely known. RIAs and financial advisers to these segments, in particular, will need to go offshore to get the higher returns expected by their customers. Impact on Economies Due to the growth in exchanges, the global economy now has an increasing number of distribution channels for investment capital than it has ever had in the past, promoting global liquidity. As these exchanges and their supporting infrastructure mature (likely with the help of global exchange partners), this should promote wealth creation on an accelerated scale as capital will be enabled to flow more freely to high return opportunities. The existence of exchanges will also provide increased incentives and opportunities for private investors, such as private equity firms, to purchase emerging market companies, improve them and then float them on the local exchange as an exit strategy. Of course, how local governments manage and regulate the markets will be a large determinant of how much wealth they add to the economy. A pragmatic regulatory and accounting environment, openness to foreign investment and low taxes on dividends and capital gains will all enable these exchanges to prosper. Capco Institute is the research arm of Capco Capco is the first services and technology solutions provider exclusively focused on forming the future of the financial markets. We unite thought leadership and practical application to improve profitability for our clients. CONTACT: Shahin Shojai Ph.D. Editor - Capco Bulletin editor@capco.com Capco Institute Disclaimer This briefing is provided as general information, and does not constitute definitive advice or recommendations. Any views expressed in the above articles are those of the author concerned and do not necessarily reflect the views of Capco or any other party. Capco has not independently verified any facts relied upon in any of the comments made in any of the articles referred to. Please send any comments or queries to Shahin Shojai. © 2007 Capco - All Rights Reserved Any text included with the Capco Bulletin shall not be used for any purposes except for personal and non-commercial use. Capco neither endorses nor is responsible for the accuracy or reliability of any opinion, advice or statement made on Capco Bulletin. Under no circumstances will Capco be liable for any loss or damage caused by a Reader’s reliance on information obtained through Capco Bulletin.