WORLD FEDERATION OF EXCHANGES
THE SIGNIFICANCE OF THE EXCHANGE
INDUSTRY
Thomas Krantz
Secretary General
Regulated securities
exchanges provide
solutions by creating
greater efficiencies
across the public
capital markets value
chain, and diffusing
ever more complex
and better quality
financial information
to support the work of
all actors.
CONTACT INFORMATION
Contact Name
Mr. Thomas Krantz
Secretary General
E-mail
[email protected]
Website
www.world-exchanges.org
At the Heart of the World Economy
Since the end of the 1980s, regulated securities
and derivatives exchanges have come to play a
major new role in international finance. That role
is qualitatively different from anything seen
since World War II. Quantitatively, the markets
operated by exchanges have grown to a scale
unimagined before, positioning them at the
heart of the world economy. This remains true
despite current macroeconomic difficulties
covering large parts of the world. The active
confrontation of buy and sell orders on a public
market determines corporate asset values in a
manner that is fair and visible to all.
Exchanges have made this business growth
possible, and the size of their industry has
changed their position within the international
economy. They have done this by:
• aligning their corporate strategies with the
business potential
• adapting the rules for trading access and
listing of securities
• training their staff and investing in
infrastructure
• boosting the commerce of finance with new
telecom and computer technologies
• providing stimulus for trading and improved
risk management through derivatives markets
• supporting pension and retirement savings
schemes
• participating in the reorientation of finance
from bank loans into securities
• promoting the increase in cross-border
investment and trading
This expansion in the work of regulated
exchanges coincided with a trend in the late
1990s leading many bourses to switch from a
business structure based on broker
cooperatives with member broker/bank
ownership to for-profit limited companies with
outside owners. For most of the Federation’s
members, business objectives changed with
this new governance form. The heightened
commercial feel of this industry also affected
those exchanges maintaining their mutual legal
form, and they have proven themselves to be
successful competitors. The dynamism of these
businesses is one reason for the qualitative
difference in the role of exchanges in this
century: the markets could not have grown in
scale to the extent they did, even considering
the current downturn, if their operations were
not of high quality, and recognized as being the
most efficient venue for listing and trading of
securities and standardized derivative
instruments.
Exchanges are visibly identified with the
commercial spirit of the times. Exchanges
symbolize market capitalism. The level of their
activities gives an instant short-hand summary
of entire nations’ socioeconomic health. It is
natural that these enterprises be managed as
dynamic businesses in their own right, enabling
them to meet the commercial demands of the
markets.
The Transformed Position of Exchanges
In December 1990, the World Federation of
Exchanges (formerly FIBV) counted 38
members. The total market capitalization of
equities listed on these bourses was US$ 9,400
billion, and the value of share trading for the
year hit US$ 6,211 billion.
By June 2003, the Federation had grown to 56
members. Total market capitalization had risen
to US$ 25,481 billion, after reaching a high point
in March 2000 of US$ 36,286 billion. The value
FEDERATION OF EURO-ASIAN STOCK EXCHANGES YEARBOOK 2003/2004
PAGE 18
of share trading during 2002 fell back to
US$ 33,453 billion, compared to the previous
year’s US$ 41,225 billion, and on an annualized
basis stood at USD 30,748 billion in June 2003.
While the business environment is difficult, the
charts show that the long-term growth trend of
increasing public reliance on capital market
financing remains intact. Like the underlying
growth in the economies themselves, this
upward trend remains subject to fluctuation.
This long-term trend translated into:
• growth in equity market capitalization over
the period of 171%
• growth in trading volumes of 395%
• acceleration in the annual turnover velocity
of shares from 66% to 121% , doubling the
liquidity provided on regulated exchanges.
Enhanced business profitability, privatizations,
IPOs, indexes and derivative products, and
cross-border trading fed this transformation.
The exchanges were key actors which adapted,
invested, participated and enabled this to take
place.
The Scale of Regulated Exchanges
By all measures, the health of an exchange is
vital to a market economy. As a percentage of
gross domestic product, the value of equity
market capitalization of Federation member
exchanges varied from a low of 9% to a high of
313% at the end of 2001, the last year for which
the IMF’s GDP statistics have been provided.
The global average market capitalization for
equities on members’ exchanges was 73% of
GDP in 2001. Moreover, these assets include
most of the world’s most highly prized
companies.
At the end of 1991, 25,980 foreign and
domestic companies were listed on member
exchanges. Ten years later, at the end of 2002,
this number had grown to 38 333. The world’s
corporations favor this source of funding, and
economic theory and practice confirm the
efficiency of this form of capital financing.
In 1999, companies and governments raised
new capital on Federation member exchanges
amounting to US$ 754 billion, and this
increased to US$ 896 billion in 2000 under
market conditions that were becoming less
favorable. The figures for fresh capital raised
have dropped steeply since, to US$ 342 billion
in 2001 and US$ 262 billion in 2002. But these
amounts remain very significant economically.
Economic reliance on exchanges is one of the
key changes in finance over the last decade.
Public policy makers, corporations, and the
saving public have come to appreciate the
importance of these figures as the historical
trend remains striking.
Moreover, in many parts of the world, exchange
index movements have come to be integrated
into the rhythm of daily life, every few minutes
on the radio, at regular intervals on television,
and constantly on the Internet. The capital
markets have given rise to considerable
expansion of the specialized printed press, too.
The names of broad equity market indices are
commonly recognized as being of social
importance. When the market moves more than
a few percent up or down, it is big national
news. When exchange trading is interrupted for
whatever reason, that too is major news.
Clearly, a different kind of financial business has
emerged on the scene. No other actor has such
an affect on the public mind, and that, too, is
meaningful.