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					                  Executive Summary
Faster, Larger, Riskier: Investing in the Future Global
Stock Exchange
by Joan E. Foltz
      The globalization of the world’s stock exchanges is causing
structural shifts in the financial industry that have long-term impli-
cations for equity markets, regional economies, and individual in-
vestors. Recent mergers and acquisitions among the exchanges show
acceleration along a trajectory based on the adoption rate of market-
based governance across the world.
      Continuing deregulation accompanies free-market economies,
which is enabling a global stock exchange to emerge as a self-
organizing system. Risk and rewards will be determined by strate-
gies that look at the market as a system restructuring with changing
forces. An understanding of how the stock markets will represent the
behavioral patterns of their players and how to recognize funda-
mental organizational structures will benefit investors in the future.

                    About the Author
Joan E. Foltz is a principal of Alsek Research, a socio-economic analyst
of global economic development and publisher of Alsek’s Not-So-Daily
Update, unbiased mapping of market behavior.
        Faster, Larger, Riskier
      Investing in the Future Global
             Stock Exchange
                               Joan E. Foltz

      Prognostication of a market-based governance system, one
where global development is driven by free-market forces, is sup-
ported with the accelerating globalization within the financial in-
dustries, particularly the stock exchanges. Emerging as a leader to-
ward a unified global system is the projection of what could soon
become a Global Stock Exchange made up of either one dominant
exchange or two primary exchanges that are restructuring the global
stock, commodities, and currency markets.
      The brisk merger activity among stock exchanges is forming
interdependent, global financial markets and creating shifts in the
forces within financial systems, most importantly the power struc-
tures. These long-term structural changes bring new characteristics
and powerful implications that impact not only the global econo-
mies, but also corporate strategies and individual investors’ deci-
sions, requiring a different way to eye the new landscape emerging
in the trading environment.
      The current phase of rapid consolidation of exchanges was pro-
pelled by the New York Stock Exchange when it became a public
corporation in 2007. At that time, the purpose of the exchange shifted

     Joan E. Foltz is a principal at Alsek Research. E-mail
304                            Seeing the Future Through New Eyes

away from providing an organization supporting its members to max-
imizing business profitability by horizontally expanding with the im-
mediate acquisition of the Euronext, the European exchange. This
propelled a merger and deal mania among competing exchanges and
related infrastructure companies scrambling to capture international
      With the spread of the adoption of capitalism and free-market
economic systems, countries with nationalized exchanges will be
unable to compete against the behemoths created by the mergers
and acquisitions (M&A) that are forming a globally interconnected
trading system of powerful networked partners. The vertical and
horizontal depth of the M&A activity spreading into other segments
of the investment industry advances the efficient infrastructure,
which opens a myriad of opportunities for new financial product
innovations. However, it also creates structural changes that will al-
ter the future of equities’ market behavior. These opportunities at-
tract new entities, which in turn will create new challenges as differ-
ent major factors surface.

Global R each: The chanGinG l andscape
      M&A activity is forming a global financial landscape layered
with intertwined, networked exchanges and affiliated stakeholders
servicing the different subsets of companies from large multinationals
to small firms, all seeking exposure to international investors. This
phase of consolidation, led by the two largest exchanges — the
NYSE/Euronext and NASDAQ — is shaping into a few predomi-
nant transregional systems. The rate of expansion follows the rate of
change made in emerging regions’ regulatory policies as they allow
foreign ownership of national exchanges, open to free markets, and
form strategic alliances to share trading platforms or other transac-
tion-processing systems.
      Distinct financial centers are arising within the regionally cen-
Foltz: Faster, Larger, Riskier                                  305

tered, interdependent systems, as the competitive race to capture
markets in equities and other financial products repositions national
players. Since many of the major markets (e.g., the BRICs — Brazil,
Russia, India, and China) still restrict foreign ownership, the final

              Figure 1: World Stock Exchanges

alignments culminating into power centers remain unforeseen.
      In 2004, NASDAQ started competing for the listing business
by offering dual NYSE-NASDAQ listings for companies. New ac-
counting standards that allowed companies to cross-list on foreign
exchanges significantly expanded their access to foreign investors
and larger markets. Now, U.S. investors can access more than 420
non-U.S. companies listed on the NYSE and approximately 335 on
the NASDAQ exchanges and through American Depository Re-
ceipts (ADRs). Companies registering initial public offerings that
want the benefits offered by the NYSE, but do not want to pay the
costs incurred when registering as a U.S. offering, can go through
Euronext, a branch of the NYSE.
      In the future, as the exchanges continue to merge and share
infrastructure, the trading landscape will likely morph into one in-
306                            Seeing the Future Through New Eyes

terconnected exchange, where trades will be accessible to any inves-
tor on a centralized trading platform. The listing exchange and
regulations will be transparent to the trader. Until then, the primary
driver of the industry’s consolidation will be competition for the po-
tential surge of liquidity found in new emerging markets.
      Both regulatory changes and advancements in electronic trad-
ing systems have enabled exchanges to go global. NASDAQ, which
started as an electronic exchange, always had a strategy to build an
international trading service based on an online-trading system.
Since the 1990s, NASDAQ has built a foreign presence through
various alliances, starting with a joint Internet information service
with the Hong Kong Stock Exchange and its launching of the
NASDAQ Canada in 1999.
      On the European front, the Paris, Brussels, and Amsterdam
exchanges formed the Euronext in 2000, which also acquired the
Portuguese Lisbon exchange. In 2007, as soon as the NYSE became
a public corporation, it proposed a merger with Euronext, which
was finalized in 2008 to form the world’s largest stock exchange,
valued at more than $20 trillion.
      The NYSE takeover of Euronext triggered a rush for stake
claiming. However, bidding wars emerged when the NASDAQ, a
15 percent stakeowner in the London Stock Exchange, made a bid
to acquire the remaining LSE shares in 2006. The offer was re-
jected. Moreover, the aggressive move to take over the third-most-
active exchange pulled Borse Dubai, a United Arab Emirates ex-
change, into negotiations, which caused a significant change in the
landscape of global financial centers.
      The ongoing fight to acquire the LSE ended with a shuffle of
convoluted ownership structure. Borse Dubai settled with a 28 per-
cent stake of the LSE purchased from NASDAQ’s shares. NASDAQ
became the principal commercial partner of Dubai International
Financial Exchange in exchange for the Borse Dubai taking 19.99
Foltz: Faster, Larger, Riskier                                   307

               Table 1: Top 10 Stock Exchanges
                         Market Value Total Share Turnover
   Stock Exchange        (US$ trillions) (US$ trillions)
   NYSE Euronext                 $20.70           $28.70
   Tokyo                           4.63             5.45
   NASDAQ                          4.39            12.40
   London                          4.21             9.14
   Shanghai                        3.02             3.56
   Hong Kong                       2.97             1.70
   Toronto                         2.29             1.36
   Frankfurt                       2.12             3.64
   Madrid                          1.83             2.49
   Bombay                          1.61             0.26
   Source: Wikipedia.

percent stake in the NASDAQ. And Borse Dubai took the NASDAQ
branding name.
      While the LSE fights to maintain its independence and ward
off takeovers, the NYSE and NASDAQ continue to build their
global networks. In 2008, NASDAQ and the OMX (agglomeration
of Stockholm, Helsinki, Copenhagen, Latvia, Lithuania, and Esto-
nia exchanges) will merge into the NASDAQ /OMX, pending ap-
proval by Sweden and other Nordic and Baltic jurisdictions. The
agglomeration of the various NASDAQ mergers and alliances will
cultivate the first exchange that will span the United States, Europe,
and the Middle East regions.
      The emergent organizations do not clearly define territories or
differentiating regulations. Dubai has plans to become a major fi-
nancial center servicing the Asian region between East Asia and
Europe. Singapore, already an established financial center for the
308                            Seeing the Future Through New Eyes

Asian-Pacific region, is a prime target for M&A activity as that re-
gion develops. In 2007, Tokyo purchased 5 percent of the Singapore
Exchange, SGX. Rumors say the Tokyo Stock Exchange (TSE)
plans to take a major stake or acquire SGX. That could expand the
products and technology the TSE already shares with the LSE.
However, targeting the Asian region is already part of the NYSE
Euronext and NASDAQ expansion strategies.
      Aggressive-deal making activity is not limited to any city or
country, but surfaces in all areas that enable foreign participation.
NASDAQ long ago established an office in India, and NYSE
Euronext already purchased the maximum allowed foreign owner-
ship of 5 percent in India’s Mumbai exchange, the National Stock
Exchange. The NYSE also made headway into China with the first
registered representative foreign exchange office. However, the ad-
vantage of any leading exchange may change as restrictions on for-
eign ownership are lifted in the emerging regions.
      As globalization of the industry opens opportunities, the pres-
sures to perform as a publicly traded company will fuel further con-
solidation necessary to achieve efficiencies of the integrated tech-
nologies and to exploit the massive global market. Small, regional,
and single-platform exchanges will be unable to compete.

new FoRces in The Global exchanGe sysTem’s
      As a revolutionary exchange structure emanates, new power-
ful forces will impact directions of the global economy and wield
enough power to influence regulatory policies governing regional
economics and foreign trade. Electronic trading systems, coupled
with a new massive market composed of different players, could cre-
ate significant shifts in the distribution of global capital formation.
Also, both infuse different behaviors into trading systems.
      Information technology has leveled the playing field by pro-
Foltz: Faster, Larger, Riskier                                    309

viding access to information and electronic trading to individual
retail traders with the same detail as professional traders and institu-
tions. However, the expanded base of traders also introduces new
investment strategies, trading styles, and intentions, often with con-
flicting goals. Many new traders and investors making the market
are from regions that only recently adopted open markets and capi-
talist economic structures, where individuals may not be protected
from market fluctuations. The dynamics of matured trader groups
intermingled with novice entrants, whose understanding of market
behavior is based only on current market conditions, could incite
volatility both in the trading arena and in the economies of specific
regions — if shifts of fast money constitute instability. Conversely, a
more risk-averse group of global players could add stability or induce
new agents that would balance short-term speculative progression.

Spread of Risk and Governance
      The expansion of the market adds liquidity, which fuels more
economic opportunities. The diversity of players that comes with an
international market also changes along with the shift in large hold-
ings. Institutions, such as insurance companies, pension funds, and
corporations, utilize different avenues to invest large pools of capital
with minimal impact to any particular stock or market. However,
foreign institutions are now composed of large sovereign funds that
often trade on the open markets and impact certain sectors and in-
dividual stocks. Concerns regarding their intentions, or at least their
ability to have control over stocks, industrial sectors, and regional
economies, are heightened by the lack of regulation, accounting
standards, and transparency of the foreign entities.
      Escalating numbers of pension funds spread across the world,
along with economic growth in the emerging regions, should miti-
gate any intent to manipulate a targeted stock or economy by a sov-
ereign entity. As the dispersion of foreign investments widens, the
310                              Seeing the Future Through New Eyes

sovereign fund could expose its own country’s downturn risks
through the fund’s other investments. Any sovereign fund concen-
trating financial activity to a specific target will likely trigger inter-
vention before any significant event occurred.
       The integrated connectivity of the pan-global exchanges, as
mapped in the NYSE and NASDAQ expansion, provides the means
to spread risk and leverage accumulated wealth, which is likely to be
of more value to any fund in a global economy than begets a coun-
tervailing force. Intentionally threatening a global imbalance would
provoke protectionist policies that could reduce capital flow to that
country. Hence, impacting capital formation would likely be avoided.
However, capital infusion could be used to influence countries’ and
corporations’ decisions that indirectly impact the trading environ-
       The trading environment is a large, interdependent system, so
the emerging structure will likely develop into a self-correcting, bal-
anced system that is less overpowered by waves of momentum and
speculative trading. However, the probability of forces threatening
the system’s performance rises if foreign markets overadjust with
regulatory policies that impact the integrated global market as these
countries learn market-based economics.
       The formation of regional financial centers, such as New York,
London, Dubai, and Singapore, plays a key role in global stability.
This is a step forward in the globalization transition, which leads to
international regulation and has the potential to undermine the
powers of nation-states.
       Eventually, the global exchanges will have to agree to a set of
international standards. Without those, the practices of all players
may not be in the best interests of any particular country. An ex-
ample is speculative commodity prices driving up inflation, which
could hurt economies that cannot absorb the costs. Another exam-
ple is the 2007 subprime mortgage crisis, which started in the United
Foltz: Faster, Larger, Riskier                                      311

States and rippled throughout the foreign exchanges due to foreign
participation in the derivatives, yet alleviated some of the risk to the
United States. Risk will increase as countries deregulate to partici-
pate in the global market. Competing financial instruments will
propagate new investment opportunities, which will continue until
creative financing is exhausted or the ramifications from regional
regulatory regimes pose predatory or protectionist repudiation. The
most significant benefit of a global market is that risk is spread across
the world.
      The decoupling of investment banking from commercial bank-
ing regulations has opened the doors for developers of creative secu-
ritization that has embedded unregulated financial instruments in
the complex integrated systems; such moves expose innocent recipi-
ents to unknown high levels of risk and insecurity. Without a set of
international accounting standards, the exploitation of unregulated
securities by passing them through regulated funds will become
harder to track as the portfolio of investment products inflates
      The geographic diffusion of shocks no longer depends on the
epicenter of the shock or the periphery. The spatial dislocations are
now more dependent on the linkage between the participants in the
arbitrage. Episodes that cause economic crisis to a particular coun-
try will receive pressure from agents in the trading system. The cor-
recting mechanism will come from the periphery (countries) that
will impart controls on the market, which is more prone to organiza-
tion based on human behavior. The free-for-all speculative trading
that some fear could lead to a gambling market should evolve into a
global institution with universal ideologies. Decision making will
shift from the financial institutions, broker/dealers, and traders as
the center of gravity to a universal world order. Organization will
not be based on ideologies, but on risk management of an integrated
312                               Seeing the Future Through New Eyes

      Globalization has shifted traders’ awareness from regional
centers to the core of financial centers. Economic concerns that im-
pact overall exchange performance arise from adverse shocks to as-
set sectors. Political or economic instability at the periphery usually
remains insignificant, discounted with little impact on markets. This
global mind-set versus a regional mind-set will prevail in a pan-
regional marketplace.

Capital Formations and Shifts in Distribution
      A global stock exchange platform makes the opportunity for
asset accumulation available to more people. Inequalities in capital
formation can accrue in open markets if governments are left out of
the distribution architecture. As countries adopt market-driven gov-
ernance, more people will be pushed toward participating in pen-
sion funds and other types of private investing in a system that used
to be exclusive to the wealthy and countries with stable exchanges.
The self-organizing system will increasingly expose retail traders to
a complex array of investment choices and schemes. “Smart money”
and institutional traders moving into assets that require an under-
standing of sophisticated asset management to yield the higher rates
of return will leave individual investors to lower-return assets, thus
perpetuating the increasing gap between wealthy capitalists and in-
vestors attempting to generate pensions.
      Investments maximizing returns by chasing emerging regions
and innovations can infuse significant amounts of capital into a region
or sector without having a long-term commitment. The risk of oscillat-
ing and massive withdrawals exposes regional development to the vul-
nerabilities of market sentiments. Any increase in volatility or instability
created by the diversified pool of investors could cause governments to
change policies regulating foreign ownership and investments.
      If systemic problems in the global exchange become unpre-
dictably chaotic, investors and institutions will decouple from the
Foltz: Faster, Larger, Riskier                                     313

public exchange and migrate to alternative trading platforms, such
as the emerging private exchanges, to invest among a more efficient
market in a lower-risk environment. These exchanges could draw
the liquidity, often called “dark liquidity,” from the private equity
firms and major markets as companies look for some regulation,
plus the necessary liquidity to facilitate large transactions.
       These alternative trading platforms could disrupt the financial
landscape and the structured network of exchanges by aligning with
partners from other segments of the financial industry, such as
banks, service, and technology providers. Depending on the forma-
tion and allocated resources and alignments, each exchange offers
differentiating services suitable to the goals of large block traders.
       In 2007, NASDAQ announced its PORTAL Market, a closed
trading system available to brokers and institutions trading 144A
securities (unregulated securities restricted to qualified institutional
buyers worth more than $100 million). The trading platform in-
creases the liquidity by enabling foreign investors and other quali-
fied parties to conveniently participate in private sales of 144A secu-
rities through an efficient execution network.
       Private exchanges operate not only with minimal regulation,
but also with no transparency. Qualified investors that can absorb
risk are invited to trade large blocks in Project SmartPool, an elec-
tronic block trading market accessible to European sell-side firms, a
partnership between the NYSE Euronext and investment bankers
NP Paribas and HSBC. Parties will be able to trade without disclos-
ing their identity or the bid/ask prices or size of trade. Minimal in-
formation will be required pre-trade, and information will only be
posted after settlement.
       Alternative exchanges are outcomes of regulations, such as
MiFID in Europe and Reg NMS in the United States, which take
the investing environment from a highly controlled regulatory struc-
ture to a free-market system. The flood of new products and plat-
314                            Seeing the Future Through New Eyes

forms for trading and investing that comes from deregulating the
industry will continue to change the landscape as interacting par-
ticipants produce a collective structure. These dark-liquidity trading
platforms are estimated to already process more than 5 percent of
the trading volume in the United States.

chanGes in invesTmenT sTRaTeGies
      The evolving exchanges present dynamic and fluid options to
the individual trader, brokers, and corporations. The changes in the
trading environment’s system structure will likely require adjust-
ments in strategies to include more risk assessment and more sophis-
ticated methods to identify opportunities to generate capital gains.
As integrated pan-global exchanges open foreign markets to more
investors, the systemic complexity will only grow.
      Analysis of any market will require an international mind-set,
a global view, and a whole-system understanding. Investors — cor-
porate, institutional, and individual — will have to be able to assess
opportunities throughout the world, not necessarily by regions, but
by individual stocks. With an interconnected system, a company of
any size need not depend on its economic success being linked to a
country or region, but rather on its competitive position in the world
      The complexity of understanding the expansive landscape
saturated with a myriad of financial products and equities could
have a residual effect that slows down the capital distributions while
the system finds stability. Likewise, the risk and volatility from an
open-market system could push private investors to seek stability in
funds or drive out players from the market, which will reduce liquid-
ity and cause further downturn.
      Corporations may opt to list with exchanges that are less regu-
lated to avoid stringent reporting rules such as Sarbanes-Oxley re-
quirements. Likewise, other companies may seek a regulated envi-
Foltz: Faster, Larger, Riskier                                     315

ronment for stability. In a global financial system, companies have
the option to choose the best match for their strategies, whether it is
a foreign listing or a cross-listing. This makes a market of conflicting
       A corporation that wants a market with the liquidity and abil-
ity to handle large IPOs, which would typically seek to be listed on
the New York Stock Exchange, could list on a European exchange if
the terms are more beneficial. The interdependent exchanges pro-
vide the option to raise capital and receive the securitization in mul-
tiple locations without dislocating the company’s central operations.
Threats from listed companies to move to another country will limit
the ability of the SEC and other regulators to impose their will. These
threats could be mitigated if investors prefer to keep their trading
within a regulated framework for increased protection.
       Overall, the structural changes in the globalization of ex-
change systems bring advantages such as an expanded market and
opportunities for corporations. However, challenges could become
disadvantageous for individual traders.
       A rise of private exchanges could leave the NYSE and NASDAQ
to be the aftermarket for individuals, which would result in these
exchanges becoming a gambling system functioning more on be-
havior and computerized algorithms than on investments. Those
characteristics could become more pronounced than the skeptics al-
ready perceive. Individual traders could be shut out of the lucrative
IPO market if initial offerings migrate toward private exchanges or
other instruments where there is less volatility. This could lead to
only high-risk IPOs that are more likely to fail or be insignificant to
debut on one of the major exchanges (NYSE, NASDAQ, LSE).
       The decoupling of the large block institutional traders from
the public exchanges would grossly affect stock market performance.
Left to individual players, the market would become more of a be-
havior and sentiment indicator than an economic barometer. Fads,
316                             Seeing the Future Through New Eyes

bubbles, and momentum could dominate strategies. Timing the
market would become a prevalent tactic rather than short- and long-
term investing. This would leave less-active traders disadvantaged
in a constantly fluctuating market.
      Protection will be needed for individual investors who have to
rely on investments for retirement, particularly if Social Security
becomes privatized or there are other disruptions in pension assets.
However, the massive aging population could force alternative safe
havens to be offered. Demand is expected only to increase with the
growing aging population around the world. But it is the role of the
industry to provide options for security. The conflict will be between
a global exchange, which has a purpose to maximize opportunities
fueled by liquidity, or secure programs for asset protection and sub-
scribed payout.

FuTuRe ouTlook
      Globalization of exchanges will continue to evolve and revolu-
tionize the financial industry as new economic theories are explored.
Products for creative securitization will be tested. And the role of
global exchanges will be scrutinized as they struggle to improve
their competitive position versus providing options that are in the
best interest of investors.
      The solidity of the entire global financial system will likely re-
quire somewhat of a regulated architecture. Else, national econo-
mies run a risk from potential spillover effects resulting from events
in other regions. Being on the periphery of an interconnected system
does not provide any safeguards from the core’s behavior.
      In an open market, government policies will be less influential
than traders’ behavior. Exchanges will become more representative
of a gambling environment than an investment platform. And even
though the stock market has been long compared to a casino, that
strategy will dominate until an event disrupts the fundamental
Foltz: Faster, Larger, Riskier                                   317

structure created by a shift in electronic trading systems’ methods.
       As with globalization of any industry, continuing deregulation
in the financial sector will nurture more creative products, more
competition, and more consolidation until a chaotic environment
stresses the current trajectory and causes a sharp reversal. In this
industry, there would be no reversal of a global exchange, but the
force of an international regulatory body would prevail. Fragmenta-
tion of the major exchanges will result when the rise of private ex-
changes draws liquidity from the major markets to the point of re-
ducing performance and functionality. Other alternative collective
structures could emerge from restructuring alliances in multiple sec-
tors, such as technology companies.
       As with all systems, the trading exchanges will continue on an
evolutionary path. And while in the era of globalization, they will
continue to go through stages and phases of consolidation and frag-
mentation, just as other industries do. However, since the stakes can
be high when dealing with huge sources of capital and economic
control of companies, industries, and countries, wild cards are a pos-
sibility, although unlikely due to sophisticated monitoring. The ad-
vantage of an interdependent exchange is that it is based on an elec-
tronic platform that tracks all transactions.
       A wild card that would disrupt the trading revolution might
be, for example, a sovereign fund with enough wealth to overpower
or threaten a major economy by successfully manipulating a market,
which would lead to financial wars. However, evolution of a global
economy makes most countries participating in it interdependent,
with a high probability that spillovers of any cataclysmic event would
carry significant economic damage to the perpetrator.
       A more likely scenario is the rapid shift between dominant
regional financial centers that would lead to a significant global im-
balance of major economies and threaten a global economic col-
lapse. This is in line more with the emergence stage of a self-
318                              Seeing the Future Through New Eyes

organizing structure. At that point, controls would be put in place to
stop economic destruction and reverse course. Success of these con-
trols depends on the governing bodies to implement appropriate
measures and acknowledgement by the global community of the
      The trajectory building by the consolidation of exchanges,
overall, produces benefits that far outweigh risks. Cycles and insta-
bility can slow down the evolutionary process, but they will be cor-
rected. Alternative exchanges and complexity may drive traders out
as players, but capital will remain in the system by means of one of
the integrated options. Complexity could also create opportunities
for those who have different skill sets and strategies to work within
the new systems.

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