Information About Stock Market Demutualization

Demutualization is the process of converting exchanges from non-profit, member-owned organizations to for profit, investor-owned corporations. More specifically "Demutualization" in the context of a stock exchange, means separating ownership from the right to use the exchange’s trading system. In the mutual ownership model, a broker seeking to trade on the exchange had first to be approved as an owner. Conversely, only brokers who wished to trade on the exchange would be approved as owners. If a broker resigned from the exchange or left the business, its membership (ownership) would cease. Demutualization separates these roles so that one no longer need be a shareholder (owner) to be granted trading privileges and one can be a shareholder without being a broker.

Demutualization, a change in the corporate governance structure of an exchange, is not an end in itself. The exchanges that have demutualised have done so because they found that their mutual governance structure, which once served them well, had become a hindrance to positioning themselves competitively in a global trading environment.

The traditional model of an exchange as a purely national, or even local, entity organized on a mutual basis by market intermediaries is on its last leg. The big trading houses are now global and have no loyalty to any particular market or exchange. And their big clients, the institutions, no longer need brokers to funnel their orders to exchanges: in an electronic environment, investors can access trading systems directly. This means that the exchanges must change their business model entirely to survive. First, the concept of "membership" is irrelevant with electronic trading—the marginal cost of adding an additional trader to an electronic network is rapidly declining toward zero, meaning that only transaction based charging can survive. Second, exchanges cannot afford to have their strategic focus dictated by brokers, who are naturally determined to prevent disintermediation of their services.

Demutualization is imperative—not to raise capital, which is a smokescreen—but to disenfranchise the members who block trading system expansion and innovation. Providing direct remote access for investors, foreign and domestic, is increasingly essential to attracting, and even keeping, their business.

Forms of Demutualization

A demutualized stock exchange might take different organizational forms. Some exchanges have demutualized and become public companies listed on their own exchanges. Other exchanges have demutualized but remained private corporations. Others are subsidiaries of publicly traded holding companies. Empirical examples include the Australian Stock Exchange which is a public company listed on its own exchange, the Amsterdam Exchange and the Toronto Stock Exchange which are presently private corporations, the London Stock Exchange arranged for an off-market trading facility for its shares and the Pacific Exchange in the United States converted its equity business into a wholly owned subsidiary of the exchange and the OM Stockhooms borsen AB is a wholly owned subsidiary of a listed company.