Demutualization and customer protection at self-regulatory financial exchanges


  • We are grateful to two anonymous referees and to Jiro Kondo for very helpful comments and suggestions. We thank Jennifer Elliott, Jo Grammig, Assaf Hamdani, Robert Hauswald, Jim Moser, Mike Penick, Mehrdad Samadi, Ria Steiger, and seminar participants at the U.S. Securities and Exchange Commission (SEC), the International Monetary Fund (IMF), the CFTC, American University, the 2008 CFS Conference on the Industrial Organization of Securities Markets in Frankfurt, the 2008 Annual Meeting of the American Law & Economics Association in New York (Columbia University), the 2007 Annual Meeting of the European Finance Association in Ljubljana, the 2007 Conference on Institutional Foundations for Industry Self-Regulation at Harvard University, the 2006 Annual Meeting of the European Association for Law and Economics in Madrid, and the 2006 RS-DeGroote Conference on Market Structure and Integrity in Toronto (McMaster University) for useful comments. We thank without implication Alex Frino and officials at the SEC and CFTC for information on enforcement activities in U.S. financial markets, and Emiko Kawagoshi for excellent research assistance in gathering related statistics from nonconfidential sources. We are also grateful to market compliance and regulations officers at various US exchanges for very helpful discussions. This study was written in large part while Michel Robe was a Visiting Senior Economist at the CFTC, on detail from American University. As a matter of policy, the CFTC disclaims responsibility for any private publication or statement by any of its employees or consultants. This study reflects the opinions of its authors only and not necessarily those of the CFTC, of the Commissioners, or of the authors' colleagues upon the Commission. Errors and omissions, if any, are the authors' responsibility.


In the past decade, many of the world's largest financial exchanges have demutualized, i.e., converted from mutual, not-for-profit organizations to publicly-traded, for-profit firms. In most cases, these exchanges have substantial responsibilities with respect to enforcing various “trade practice” regulations that protect investors from dishonest agents. We examine how the incentives to enforce such rules change as an exchange demutualizes. In contrast to oft-stated concerns, we find that, in many circumstances, an exchange that maximizes shareholder (rather than member) income has a greater incentive to aggressively enforce these types of regulations. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:126–164, 2011