The McDonaldization of financial markets?

September 24, 2007

Daniel, the NY link of this little London-NY collaboration, sent me this link to a NY Times article about the immanent closure of some of the physical trading floors of the New York Stock Exchange. Some of the readers of this blog came to a tour of the New York Mercantile exchange where a similar message, about the rapid move from face-to-face to screen-based trading, was conveyed (see here).

This article, however, implies to yet another dimension of the move to screen-based that’s less obvious:

After becoming a publicly traded company itself last year by merging with Archipelago Holdings, the exchange’s operator merged in April with Euronext, which owned stock and futures exchanges in London, Paris, Brussels, Amsterdam and Lisbon.

This gradual amalgamation of financial markets at the institutional level into a single techno-social network means, for many institutions, that traders would have to go home (either retire or trade from outside the floor). But, this also means that markets now would use unified clearing and settlement systems (Euroclear), or in other words, that the exchanges’ risk management is gradually becoming centralised. In fact, by the end of 2007, Euroclear, who provide clearing and settlement services for Euronext will “move into the implementation phase of our platform consolidation programme, with the launch in production of the Single Settlement Engine (SSE).” It is feasible that such consolidation will deliver better efficiency, but it also raises questions about the ability to manage financial risks in a cross-owned network of exchanges that constitutes a large share of the global trading volume. For example, the operation of a unified risk management system may create inadvertent drops in prices in entire sections of the market by generating sale orders. I am sure that Euronext are much more sophisticated than this, but, at least at the conceptual level we can ask the question about the new forms of risks that are introduced to the financial markets through the creation of such exchange conglomerates.

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