Dr Joseph Lee: Synergies, Risks and Regulation of Stock Exchange Interconnections

The stock exchange industry is faced with new challenges brought by technology advancement, and the industry has been through several phases of competition and consolidation. Such industrial transformation will act as catalyst to breaking through the current banking systems to bring about more innovation and more inclusiveness in the economy.

Stock exchange interconnections can bring synergies – increasing investors’ exposure to international markets, deepening capital pool and enhancing liquidity, reducing costs of market structure, and innovating new products such as the exchange traded funds (ETFs). Currently, no regulatory regime has given special attention to facilitating these exchange–led connecting activities. The major policy concern is revolving around breaking the national barriers and maintaining market stability. Policy to drive competition in capital market has – to some extent - been successful in breaking through the silo models operated by many exchanges. While market stability measures can, on the one hand, facilitate breaking the national barriers, they can also have the effect of foreclosing competition between securities transactions providers at cross-border level such as the ECB’s location-policy on clearing houses.

This paper argues that regulation should make a clear distinction between the different markets in which the exchanges operate i.e. cash equities or derivatives market. The exchanges play very different roles in these markets. In cash equities markets, the exchanges, acting like a product promoter, provide platforms for businesses to meet with all kind of investors (including retail ones). In derivatives markets, exchanges are the product-creator and provide hedging services to the investors (not retail investors). Their risk profiles depend on the nature of the products traded, the relationships with the traders, the relationships with the investors, and the relationships with the end users of these products. What kind of regime would be optimal to ensure transparency, investor protection, market stability, and investment efficiency (low-cost transactions) should not ignore this important distinction. Hence, when looking at the risk management function of the central counter-party (CCP), the benefits of multiple trading platforms to increase competition, issues on the governing law and regulatory jurisdiction to reduce legal risk, and the kind of dispute resolution mechanism to manage trading efficiency, it is important to distinguish the market and the product in question. To mix the two structurally different markets in the regulatory discussion would lead to a confusion in the policy on market interconnections.

These seminars are open to staff, researchers, postgraduate students and the university’s stakeholders.

The aims of the seminar series are to stimulate intellectual discussion, provoke thoughts, engage in the debate of current issues, and disseminate research findings.

Exeter Law School research seminar series is convened by Dr Joseph Lee, Senior Lecturer in Law.

If you are interested in attending any of the seminars, please contact Dr Joseph Lee at j.lee@exeter.ac.uk.