Role of Exchanges in Well-Functioning Markets

Stock exchanges play a central role in facilitating the funding of firms and promoting investment and wealth creation. They provide two key services to economic growth and capital markets – policing of listing privileges and a price discovery process. Technological advances and regulatory changes have led to competitive forces that created faster and more fragmented markets. The new landscape has challenged exchanges to maintain their central role, and has forced asset managers to adapt in how they source liquidity in these markets. Concurrent with these market structure developments, the mix of investors has evolved. Institutional investors, in particular, have become the dominant market participant, making fewer but much larger trading decisions. The classic model of many investors, few broker/dealers and even fewer trading venues is starting to invert. In this note, we discuss key developments in the evolution of markets in relation to the central functions played by exchanges. Based on our investment and trading experiences, we highlight issues of concern, and provide a perspective on areas of interest to a large, long-term asset manager