THE SIGNIFICANCE OF THE EXCHANGE INDUSTRY
J U LY 2002

WORLD FEDERATION OF EXCHANGES

At the Heart of the World Economy
Over the past decade, regulated securities exchanges have come to play a major new role in the international financial system. That role is qualitatively different from anything seen since World War II. Quantitatively, the markets operated by regulated exchanges have grown to a scale unimagined before, giving them an active role and responsibility at the heart of the world economy. Exchanges have made this possible by : • aligning their corporate strategies with the business potential • training their staff and investing in infrastructure • boosting the commerce of finance with new telecom and computer technologies • providing stimulus and improved risk management through derivatives markets • supporting equity savings through pension and other retirement schemes • participating in the reorientation of finance from bank loans into securities • promoting the increase in cross-border investment and trading From the perspective of exchanges, this commercial expansion coincided with a broad trend in the last half of the 1990s to switch from a business structure based on broker cooperatives with inside ownership to for-profit limited companies with outside owners. For most of the Federation’s members, business objectives changed with this new governance form. The heightened commercial feel of this industry also affected those exchanges maintaining their mutual legal form, and they have proven themselves to be successful competitors. The dynamism of these businesses is one reason for the qualitative difference in the role of exchanges in the 2000s : the markets could not have grown in scale to the extent they did, even considering the current downturn, if their operations were not of high quality – and recognized as being of high quality. During the 1990s, exchanges came to be identified with the highly commercial spirit of the times. Exchanges symbolize capitalism, and are at the heart of the system. The level of their activities gives an instant short-hand summary of entire nations’ socioeconomic health. It is only natural that these enterprises be managed as dynamic businesses in their own right. This document outlines some of the perspectives of the world’s regulated exchanges : with this heightened economic significance, the operators of bourses must have their needs understood by other financial actors and by government policy makers. These persons know best how to improve the markets they operate. Their know-how is crucial in the current tougher markets. Their professional responsibilities prompt them to step forward to be heard.

The Transformed Position of Exchanges
In December 1990, the World Federation of Exchanges (formerly FIBV) counted 38 members. The total market capitalization of equities listed on these bourses was $ 9 400 bn, and the value of share trading for the year hit $ 6 211 bn. By June 2002, the Federation had grown to 56 members. Total market capitalization had risen to $ 25 054 bn, after reaching a high point in March 2000 of $ 36 286 bn. The annualized value of share trading during the first six months of 2002 fell back to $ 35 826 bn, compared to the previous year’s $ 41 225 bn. The long-term growth trend of increasing capital market use remains intact, and like the underlying economies themselves subject to fluctuation. This trend translated into : • growth in equity market capitalization over the period of 167 % • growth in trading volumes of 476 % • acceleration in the turnover velocity of shares from 66 % to 143 %, demonstrating the increase in liquidity provided on regulated exchanges Enhanced business profitability, privatizations, IPOs, indexes and derivative products, and cross-border trading fed this transformation. But the exchanges themselves were the actors which adapted, invested, participated and enabled this to take place.

The Stakes
By all measures, the