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Commentary: An Ipo Of The Big Board? Why Not?


Commentary: An IPO of the Big Board? Why Not?

One of the jokes among investors is that when brokerage firms and their executives start unloading their stock on the public, it's a sure sign the market has peaked. So what kind of omen is it when the stock exchanges themselves are rushing to go public?

The very concept of publicly traded exchanges may sound illogical. After all, where would NASDAQ list its stock, on the New York Stock Exchange? But it may become reality in the near future. With almost a dozen exchanges stretching from Australia to Iceland having successfully made the switch from the old cooperative structure to public ownership, officials from several exchanges across North America--including the Toronto Stock Exchange, the Chicago Mercantile Exchange, and NASDAQ--have publicly broached the idea of taking their exchanges public. The NYSE has informally discussed the idea, but there are no plans at present. As radical as it sounds, public exchanges would be good for the markets--as long as safeguards protecting investors were put in place.STAKING A CLAIM. What's motivating these exchanges isn't so much greed as the need to counter the growing number of electronic communications networks (ECNs)--private order-matching systems like Island that have taken nearly 30% of trading in NASDAQ-listed companies. For NASDAQ, going public would help it raise the $210 million that officials say they need to counter competitive threats posed by these new rivals.

Traditional exchanges say converting to public ownership would enable them to respond more nimbly to market trends--for instance, by partnering with foreign exchanges to offer 'round-the-clock trading. Under most exchange structures, such bold initiatives too easily get ground down by the vested interests looking to preserve the status quo. At the Chicago Merc, leaders must referee among the conflicting interests of the 3,000 floor brokers, independent traders, and futures commission merchants who all now have a voice in Merc policy. But Merc Vice-Chairman Jim Oliff likes public ownership. "We would end up with a leaner organization, with fewer committees and less need for consensus," he says.

But before the Merc, NASDAQ, or any other exchange is allowed to go public, policymakers must ensure that the investing public isn't the big loser. A key issue: Can exchanges pursue profit while upholding their mandate--as self-regulatory organizations--to provide the critical "first line of defense" against fraud. During the first big market downturn, would a publicly owned exchange try to bolster its profits by cutting back on its regulatory staff? In its zeal to woo new listings from corporate issuers, would a publicly owned exchange provide a wink-and-a-nod assurance that such infractions as ignoring working-capital rules won't be enforced?

The answer may be to let the new exchanges compete as public firms--but collectively hand off oversight duties to a new self-regulatory entity to oversee all exchanges and ECNs. For investors, that would make sure that this doesn't simply devolve into a bad joke.By Dean FoustReturn to top


Regulators with Stock Options

Public stock exchanges would raise thorny issuesBENEFITS

-- Likely easier access to capital needed to develop new technology

-- Would allow exchanges to respond more quickly to market trendsRISKS

-- During downturns, exchanges could skirt regulation

-- Exchanges could try to take over rivals to limit competitionReturn to top

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