The prospect of flotation or merger for the London Stock Exchange requires that a value be set on the exchange. The figure is about £500 million sterling (€836 million).
This is less than the market capitalisation of one of the exchange's more recent entrant companies, the online auctioneer QXL. But QXL's turnover is a fraction of a per cent of the turnover of the London Stock Exchange, and the exchange has an almost unassailable market position and a near monopoly of trading in UK securities. Surely some mistake?
The economics of marketplaces is a complex business. Understanding it is not only important for those who are putting together the new iX stock market but for those who are promoting the other iXs - the Internet exchanges that arouse so much current interest.
A marketplace is a natural monopoly. Buyers will want to go where there are most sellers, and sellers where there are most buyers. So the largest market attracts most custom and enhances its position.
This has been true for centuries.
As markets became more complex and sophisticated, marketplaces tended to evolve in one of two ways. Some marketplaces, such as the London Stock Exchange, acquired a central organisation. Others, such as the foreign exchange market, did not.
What we call the foreign exchange market is simply the interacting and inter-related activities of many independent participants. There is no committee or council and there is nothing that an investment bank could float or sell.
Central organisation usually developed because of the need for regulation. The London Stock Exchange acquired its authority because players needed assurances of the integrity of processes and participants, and it also helped to standardise procedures and practices. Local authorities took control of street markets because someone had to impose order on the chaos and congestion that ensued in the town. In this way, the management of marketplaces fell into the hands of mutual organisations, such as the exchange or public authorities.
There are many hybrids, such as Covent Garden Market Authority, a statutory body controlled by market participants and there to represent their interests. Some of the organisations simply manage the logistics of the market as with local-authority control of street markets.
Others, such as most of the recognised securities exchanges, impose economic regulation of the activities that once occurred on their premises and today take place under their auspices.
The economics of natural monopoly apply in all markets. Estate agency is a natural monopoly. Almost every home buyer must have thought that it would be simpler if there were one place where every property was on display. Given the advantages of scale and liquidity it would seem that the agent with the largest market share would enjoy an impregnable position. But in practice estate agency is a very fragmented business.
Although there are real advantages of scale in making markets, they are not large. It is not very costly for buyers to consult several market makers. And ease of entry into market making is such that as soon as you exploit the benefits of scale they disappear. Larger estate agents have advantages but so do their competitors. The structure of the property market is a constantly changing balance between the two.
So some marketplaces have mutual or publicly owned central organisations with a trading monopoly: others reflect the spontaneous interaction of competitive private firms.
Mutually owned monopolies suffer the inefficiencies and governance problems common to mutuals, public ownership and monopoly. Successful new marketplaces such as Nasdaq and Deutsche Borse have won ground by challenging incumbents who have fallen victim precisely to these difficulties.
Fragmented, privately owned marketplaces often fail to establish the simplicity and transparency or the public confidence that a single organisation can provide.
But privately owned, centrally organised monopolies usually offer consumers the worst of both worlds, which is why they do not succeed. Efficient markets make money for market participants but not for market makers. That is something the enthusiastic promoters of business-to-business exchanges have yet to understand.
