Networked securities markets: from cross-listing to direct connection

Securities markets can be linked by dual or cross-listings, international funds of funds, and direct connection between trade-matching platforms. The development of this networking process has been a product of changing technology, the shape of law and the profit incentives of leading broker-dealers. The relative value of different methods of linkage should be judged on the basis of the stage of technological development, market liquidity, efficiency and fairness to the constituencies using markets. Securities markets consist of three, main constituencies: issuers of securities, investors in securities, and broker-dealers trading in securities. Over the past century each of these players has offered the others a method of linking securities markets into a larger transaction network. From the 1920s, issuers have paid to list their shares on more than one exchange, and such ‘cross-listing’ was ideal for investors and brokers because it allowed them to benefit from access to these securities without bearing the costs. From the 1980s, institutional investors established multinational structures of funds, so that by purchasing a share of a ‘fund of funds’ on one market, it was possible to invest in a fund containing securities of another. With institutional investors bearing the cost of this linkage, issuers, brokers and retail investors benefited. About 2000, brokers took advantage of improving technology directly to network venues of listing in one jurisdiction with venues of trading in others. In the US and the EU, major broker-dealers simply set up alternative platforms and convinced governments to change the law so that securities listed in one place could be traded on a private platform in another. This benefited primarily broker-dealers capable of funding the creation of such alternative platforms. In China, exchanges connected to each other with the reverse effect. The connections allowed even small brokerage companies trading on one market directly to access another. This paper examines the evolution of these three networking arrangements in connection with technological change, regulatory development and the interests of key market constituencies.