Much has been written recently about whether the public offering of exchange shares has impaired the ability of exchanges to police their users. The argument is that, facing shareholders who wish to maximise exchange profits, the markets may go easy on large customers when enforcing their rules.
Some even romanticiae the (forgive the hyphens) pre-public-ownership system of exchanges owned and managed by their user-members. A group of people who knew where to draw the line, who hammered violators because it could imperil all of them. As owners and users, they dare not risk the greater franchise.
I was there. Much truth lies in that premise, but the "mutualised" exchange had its problems too. It is no accident that the Commodity Futures Trading Commission banned "conflicts of interest" on exchange boards and committees long before any of them "went public." Violators might not simply be owners but also members of the governing board and of key committees.
Members of committees overseeing rule enforcement and market surveillance would be privy to the trading data of their closest competitors, information that was otherwise Top Secret. They rarely abused that privilege but the possibility was ever-present. Board members on exchanges, like everywhere else, could (but seldom did) "trade favors" with their colleagues for decisions advancing their own business interests.
The "public" exchange injects remote shareholders who care little about any given user's success or failure, only the exchange's bottom line. Self-regulatory costs are substantial and erode exchange profits. But shareholders may be a large and diverse group that can seldom shape the will or policies of exchange management, unlike the biggest members during the mutualised era.
Net-net, I see little change in the "conflicts of interest" equation. It is an issue that needs monitoring, to be sure, but no reason to despair simply because of a structural change in exchange ownership. One should assume that a scandal at an exchange would damage shareholders' interests as would a product defect at any other company that they invest in.
Following the collapse of MF Global and the revelation that some $1.2 billion in customer segregated funds had "gone missing," the CME Group - a publicly-held owner of three U.S. futures exchanges doing over 90% of all futures trading in that country - offered to the MF Global bankruptcy trustee some $500+ million dollars to expedite the return of funds to customers. I am not familiar with the details but is this something that greedy shareholders wishing only to capture maximum revenue would endorse?
Most recently, the CME Group set up a $100 million fund especially to protect farmers and ranchers from the "MF Global risk." This, like its offer above, could mean less for the shareholders in the short term but a more robust CME Group going forward.
So, let's get on with the business of making these markets work, regardless of ownership. Portraying public shareholders as a corrupting influence is simply unsupported by the facts.
Philip McBride Johnson is a former chairman of the CFTC