The NYSE-Archipelago merger : a case study in the evolution of exchange structures

Abstract

At the time of this writing, the NYSE had just completed its historic merger with Archipelago, LLC, while changing its ownership structure to a public company. The conditions leading up to this transformation are descriptive of the overall changes in "exchange structures" and the infrastructure of equity trading in the United States and around the world. The document is written to be useful to an audience of both industry and non-industry executives. To accomplish this, we examine the historical underpinnings of exchanges, how they developed, identifying conditions that transcend structures themselves. We go on to describe the mechanics, governance, technology, and regulatory environment of exchanges today. From this we can examine the forces inducing and enabling changes in the market structures. The "investment supply chain" is introduced as a framework to understand the flow of capital in the economy and the changing position of the exchanges and industry players. We consider the anatomy of trading, evolving technologies and the experience of non-US exchanges in the process of demutualization, technology infrastructure change and business model evolution. The thesis also draws on inferences from similar economic shifts in other industries.

(cont.) The parallel industry discussion should serve as an intuition builder in understanding the forces at work, the time it may take to see an equilibrium state and the behavior of the participants. The thesis has relied heavily on interviews and perspectives of people close to these events: NYSE staff, ECNs, the buy and sell side, regulators and academics. As such, it attempts to provide an informed and balanced view of the current state of play and the momentum of events.