“Fundamentally exchanges are just networks,” says the New York Stock Exchange’s (NYSE) main representative in Asia. And the real long-term impact of the internet on the business of stock trading comes from the expansion of those networks worldwide.
This, says Shapiro, has put globalization pressures on exchanges and regulators that goes
beyond the rise of online retail brokers and even the electronic communication networks (ECN) that have captured a good deal of the volume in US markets.
“It’s primarily about access to information,” he explains. “Since 1997, coincidentally the period Asian markets were facing a lot of difficulty and volatility, but also the time when web-based trading and information access really took off, US trading volumes in Asian stocks have grown dramatically. The proportion is now double or triple what it was in 1996.”
“This has to do with a number of factors, but access to high quality information about companies in the region, about market movements in the region and analysis and news from the region, is the key. That really used to only be available to people on trading desks, but now it’s easily accessible for free on the internet.”
The internet revolution is also likely to have significant impact on the regulatory structure, with the ability to regulate who trades what and where rapidly diminishing.
“Increasingly, brokers are offering access to more than one market. That’s just the tip of the iceberg. Brokers are soon going to offer access to 30 or 40 markets through a single account in a single jurisdiction,” says Shapiro. “Once that occurs it becomes very difficult for an entity like the SFC to rationalize some of their current regulatory structure designed to prevent companies from outside the region from attracting investors in the US unless they comply with US regulatory requirements.
“Once access to those companies, by leaving the US jurisdiction, becomes commonplace, it creates a huge question mark at the level of the SFC - causing them to reconsider fundamentally the way US equity markets are organized and regulated,” he adds
This, according to Shapiro, will increase the long-term likelihood of cross-border consolidation of exchanges. And here the internet will end up having a similar impact on stock exchanges as the introduction of the telegraph in the 1800s. That invention, combined with the advent of the ticker tape, caused the number of exchanges in the US to drop by around half.
“We’re seeing a lot of noise about this already in Europe,” he says. “In Asia, we haven’t seen much noise yet, but I think it will happen. It’s being facilitated by the fact that exchanges are increasingly converting from traditional mutual organizations to for-profit listed companies.
“Fundamentally, I think the internet is having an impact on exchanges because it’s expanding the network that exchanges traditionally represent.”
