III.CHALLENGES: REGULATORY ISSUES OF TODAY
The environment of today’s exchanges is no less eventful than in the past.
There are at least four regulatory challenges that exchanges, overseers, and
policymakers from all over the world are currently faced with: profit orientation (A.), internationalization (B.), fragmentation (C.), and automation (D.).
A. Profit Orientation
In the last two decades, observers became witnesses of a fundamental
transformation in the organization of exchanges: the conversion from public
not-for-profit institutions that resembled medieval trading guilds to international business companies that seek to make profit (“demutualization”).187
180 MiFID, supra note 19.
181 Council Directive 93/22 of 10 May 1993 on investment services in the securities field,
1993 O.J. (L 141) 27-46 (EC).
182 Commission Regulation No. 1287/2006 of 10 August 2006 implementing Directive
2004/39/EC of the European Parliament and of the Council as regards record-keeping
obligations for investment firms, transaction reporting, market transparency, admission of
financial instruments to trading, and defined terms for the purposes of that Directive,
2006 O.J. (L 241)1-25 (EC).
183 Commission Directive 2006/73 of 10 August 2006 implementing Directive 2004/39/EC
of the European Parliament and of the Council as regards organisational requirements
and operating conditions for investment firms and defined terms for the purposes of that
Directive, 2006 O.J. (L 241) 26-58 (EC).
184 MiFID, supra note 19, at 36-47.
185 See supra Part I.A.3.
186 MiFID, supra note 19, at 48-55.
18
7 On demutualization, see, e.g., Oliver Hart and John Moore, The Governance of Exchanges:
Members’ Cooperatives VersusOutside Ownership, 12(4) OXFORD REV. ECON. POL’Y 53-69
550 Virginia Law & Business Review 7:513 (2013)
Today, almost all major exchanges or their operators have become stock corporations whose shares are listed on the exchange itself, publicly traded, and
scattered among financial investors.
188 The main exception is the Tokyo Stock
Exchange: its shares are not yet listed and traded, but the exchange recently
(in November 2011) announced that it will soon become a listed stock corporation with publicly traded shares.
189
Demutualization challenges the traditional regulatory framework because
it creates a broad range of conflicts of interest.
190 If exchanges become forprofit companies, their attention in exercising their supervisory powers might
shift from regulatory motives and needs to the financial implications of their
decisions. This may lead to over-regulation of areas in which the exchanges
can impose significant penalties or, conversely, to inattention to areas in
which they cannot expect such supervisory returns. There is also the fear that
exchanges may regulate competitors more strictly than affiliated companies.
Despite the fundamental transformation in the organization of stock exchanges and the regulatory concerns raised by this development, the law of
stock exchanges has largely remained unchanged in the major jurisdictions;
only minor details, if at all, have been added or altered. The MiFID (of 2004)
demands that the “conflict of interest between the interest of the regulated
market, its owners or its operator and the sound functioning of the regulated
market” be avoided, but neither prescribes nor even mentions specific strategies.191 The national stock exchange laws that implement the MiFID offer
little in addition.192
(1996);
Johannes Köndgen, Ownership and Corporate Governance of Stock Exchanges, 154 J. INSTL. & THEORETL. ECON. 224-251 (1998); Roberta S. Karmel, Turning Seats Into Shares:
Causes and Implications of Demutualization of Stock and Futures Exchanges, 53 HASTINGS L.J.
367-430 (2002); Harald Baum, Changes in Ownership, Governance and Regulation of Stock Exchanges in Germany: Path Dependent Progress and an Unfinished Agenda, 5 EUR. BUS. ORG. L.
REV. 677-704 (2004); Jonathan R. Macey and Maureen O’Hara, From Markets to Venues: Securities Regulation in an Evolving World, 58 STAN. L. REV. 563-599 (2005); Fleckner, Stock Exchanges, supra note 4; INTERESSENKONFLIKTE BEIM BÖRSENGANG VON BÖRSEN (Horst
Hammen ed., 2009) (Ger.); Erin Oldford and Isaac Otchere, Can Commercialization Improve
the Performance of Stock Exchanges Even without Corporatization?, 46 FIN. REV. 67-87 (2011).
188 For an historical overview, see Fleckner, Stock Exchanges, supra note 4, at 2554-65.
189 Agreement regarding Business Combination between Tokyo Stock Exchange Group, Inc. and Osaka
Securities Exchange Co., Ltd., TOKYO STOCK EXCHANGE, Nov. 22, 2011,
http://www.tse.or.jp/english/news/30/20111122_a.html.
190 On these conflicts of interest and on the regulatory strategies to address them, see Fleckner, Stock Exchanges, supra note 4, at 2579-2618.
191 MiFID, supra note 19, at Art. 39(a).
192 See, e.g., Börsengesetz, July 16, 2007, at § 5(4)(1); Loi 2000-1223 du 14 décembre 2000 de
code monétaire et financier, at art. L 421-11(1)(1). For more depth, see Lois du 29 octobre
7:513 (2013) Stock Exchange Law 551
In retrospect, the process of demutualization lets the fierce debates on
the German two-tier exchange system, with its separation of the exchange’s
operator from the exchange as a public institution, appear in a somewhat
different light.193 The same, although to a lesser degree, may be said for the
discussion in the United States. On the one hand, the German system cannot
be as burdensome as many observers have claimed because otherwise the
Deutsche Börse AG, the operator of the Frankfurt Stock Exchange, would not
rank among the world’s leading exchange companies today. On the other
hand, the experiences in other countries show that it does not require a binding organizational framework to ensure that exchanges assume a proper structure. In their efforts to avoid the numerous conflicts of interest that the new
structure entails, stock exchanges worldwide have come to solutions which
look, in many respects, like the two-tier system in Germany.
Possibly the best
example is the new structure of the New York Stock Exchange.
194 These
experiences indicate that the law should not prescribe a certain organizational
framework, but instead lay down specific organizational objectives. Compared
with the current regulatory approach of many jurisdictions, a regime focusing
on organizational objectives would have both regulatory and economic benefits because the exchanges could, under the new regime, react quickly to
changes in their environment without having to wait for a revision of the
statutory provisions that they are subject to.
While the debate on the organizational structure of stock exchanges is
now in calmer waters, it will probably stay on the agenda of policymakers and
scholars in a broader context: the corporate governance of financial institutions.195 The main challenge remains the same: to find the right balance between state control, self-regulation, and competition.