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Exchanges cost less than their buildings
Chad Cascarilla and his partner, Emil Woods, launched the hedge fund Cedar Hill in 2005 and bought shares and seats in exchanges in Brazil, Argentina, the United States, and Japan. They often held these positions in point-in-time vehicles built around one specific theme. The firm always kept in mind that the whole setup looked pretty unsustainable, running on zero interest rates and huge amounts of growth.
Exchanges were going electronic. Volumes rose about 10 times, and revenues rose about 10 times with them. Instead of trading below book value, they traded at a multiple of that revenue growth, and the positions returned 10 or 20 times the money.
Why did electronic trading multiply exchange volumes?
Electronic matching engines replaced floor traders, which cut the cost of each trade and let computers submit orders in milliseconds. Cheaper trades narrowed the gap between buying and selling prices, which drew in market makers and algorithmic traders. Many more orders per day followed, each paying a small fee to the exchange. In the United States, the SEC adopted Regulation NMS in 2005, which pushed the market toward fast electronic execution.
Why did exchanges become public companies?
Exchanges began as member clubs, where seat holders owned the exchange and used it to trade. The Stockholm Stock Exchange became the first to demutualize in 1993, converting its members into shareholders. Others followed in the 1990s and 2000s, including the Chicago Mercantile Exchange in 2000 and the New York Stock Exchange, which went public in 2006 after merging with Archipelago. Becoming a for-profit company let exchanges raise capital and merge across borders.
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