1. 30-May-2007
Building a global exchange
Thomas Roughan, Managing Principal, Capco and Jeni Incontro, Consultant, Capco
Introduction
Survey says: “70 Percent of Wealthy Investors Look Abroad”…E-Trade launches international trading…NYSE and Euronext to
combine…China decline triggers fall in global markets…NASD and OMX to combine…
There’s been a lot happening in the global investment space lately. Ten years ago it would have been hard to believe that a drop
in the Shanghai exchange would trigger a global sell-off, or that national champions such as the NYSE and NASD would be
looking for merger partners in Europe.
Global Growth
However, since the fall of the Berlin Wall in 1989 the world of stock exchanges has changed dramatically. In order to understand
the growth in the number of stock exchanges world-wide, we performed a top-down analysis at the country level.1
The
International Standards Organization (ISO) demarcates the planet into 244 countries / territories. The World Bank has population
and economic figures for 209 of them.
In 1988, stock exchanges existed in 63, or 26% of these countries. These countries comprised 58% of global population and 81%
of global GDP (PPP basis). Once the Wall fell in 1989 however, exchanges started to blossom everywhere.
Number of Countries with Stock Exchange
0
2
4
6
8
10
12
1585 1792 1808 1850 1861 1869 1875 1881 1890 1894 1912 1929 1953 1960 1969 1975 1981 1986 1990 1993 1996 1999 2002 2005
Year
#New
0
20
40
60
80
100
120
140
160
#Cumulative
# New # Cumulative
By 2005, there were national or regional stock exchanges present in 145, or 59% of ISO countries, which together comprised
92% of the world’s population and 99% of global GDP (PPP basis). Looking ahead, Libya, Cambodia, Sierra Leone and
Gibraltar have all announced plans to develop exchanges in the next two years.
The remaining 95 ISO countries constitute roughly only 1% of global GDP. There are 65 countries with population counts which
range from approximately 20,000 in Palau to 73 million in Ethiopia. The bulk of these, approximately 50 countries, have
populations under 10 million. The remaining 30 countries are small islands with limited or no population.
In summary, institutional and legal frameworks and infrastructure for stock trading have been established in virtually all of the
world’s significant economies at this point.
1
As well as stock exchanges, there has also been high growth in the number of fixed income and derivatives exchanges. For the purposes of this
study, fixed income and derivative only exchanges were excluded. Many of the stock exchanges included in the study list and trade multiple
instrument types, but all trade common shares at a minimum.

2. Opportunities for Exchange Operators
The rise in the number of stock exchanges around the planet offers exchange operators opportunities to expand early in promising
new markets. The benefits they could bring these new exchanges are numerous: increased visibility to investors, mature and
secure trading infrastructures and regulatory standardization. However, depending on the appetites of local officials, they could
be stymied in their attempts to buy in. Many may not want to sell at all. As well, for the exchange operators, there will likely be
competition among themselves for the promising exchanges that are available. Over time, however, it seems likely that the
independent exchanges will consolidate down into a small number of major players, likely regionally focused, with some
remaining independents, both large and small in size.
Opportunities for Investors
While all this activity is good news for exchange operators, the real question is it good news for international investors? While
some exchanges, such as China and Russia, have been booming recently, many of the other new exchanges are still in their
infancy, with limited listings, trading volume and scattered restrictions on foreign investment. The attractiveness of these
exchanges for investment by the average retail investor is muted. For international institutional investors, the same caveats apply,
but institutional investors have the resources and marketing incentive to analyze these markets in detail to determine which are
investable. Of course, the development of these markets will depend on the local environment and the appetite for local issuers,
investors and institutions to utilize and grow the existing exchange market. The most promising of these can then be added to the
investment list for SMA, mutual fund, index fund and ETF products for retail and institutional clients. As the economies grow
and mature over time, more countries should migrate onto this list. Hedge funds, ever in search of the next alpha opportunity, will
be especially keen to be the first players in.
Hopefully these new markets will be successful, for in the years ahead international diversification will be a key component to
achieving the returns needed to fund investors’ retirement plans in the developed world. As an example, according to long term
research performed by the London Business School in 2005, the U.S. has only been the number 4 performer since 1900; South
Africa, Australia and Sweden have all had better returns. More recently, other countries as well have outpaced the U.S.
Institutional investors have long allocated a slice of their overall portfolio to international, but the retail and HNW investor
segments are now taking significant interest as well as information on returns in this asset class becomes more widely known.
RIAs and financial advisers to these segments, in particular, will need to go offshore to get the higher returns expected by their
customers.
Impact on Economies
Due to the growth in exchanges, the global economy now has an increasing number of distribution channels for investment
capital than it has ever had in the past, promoting global liquidity. As these exchanges and their supporting infrastructure mature
(likely with the help of global exchange partners), this should promote wealth creation on an accelerated scale as capital will be
enabled to flow more freely to high return opportunities. The existence of exchanges will also provide increased incentives and
opportunities for private investors, such as private equity firms, to purchase emerging market companies, improve them and then
float them on the local exchange as an exit strategy.
Of course, how local governments manage and regulate the markets will be a large determinant of how much wealth they add to
the economy. A pragmatic regulatory and accounting environment, openness to foreign investment and low taxes on dividends
and capital gains will all enable these exchanges to prosper.
Capco Institute is the research arm of Capco
Capco is the first services and technology solutions provider exclusively focused on forming the future of the financial markets. We
unite thought leadership and practical application to improve profitability for our clients.
CONTACT:
Shahin Shojai Ph.D.
Editor - Capco Bulletin
editor@capco.com
Capco Institute
Disclaimer
This briefing is provided as general information, and does not constitute definitive advice or recommendations. Any views expressed in the above articles are those
of the author concerned and do not necessarily reflect the views of Capco or any other party. Capco has not independently verified any facts relied upon in any of
the comments made in any of the articles referred to. Please send any comments or queries to Shahin Shojai.
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