Types of Markets
In his seminal work, Capital Markets Law and Compliance: The Implications of MiFID, Nelson implies by the exact title of his book that MiFID inexorably is limited to “capital markets” (Paul Nelson, Capital Markets Law and Compliance: The Implications of MiFID (2008) – see reference list). However, capital markets refer to long-term securities, thereby excluding “money markets” to which MiFID explicitly applies. Though this distinction is a minor nuance, and conceivably a choice to select an attractive book “Title,” nevertheless it demonstrates the need of law and finance professionals to use a common vocabulary to provide precision and clarity to their work for purposes of deconstructing and interpreting the meaning of legal texts.
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Markets are conventionally divided as follows: primary markets, and secondary markets. They are further sub-divided as: (1) capital markets, (2) money markets, and (3) Over-the-Counter Markets (Gallagher and Andrew, supra at 26-27 – see reference list). In addition, since the decline of national exchanges and the relentless innovation in financial markets, “electronic communication networks” [ECNs] and other alternative trading systems have developed to provide investors with choice: lower transaction fees, automated order matching, and 24 hour trading (ECN’s are attractive because they cut out the middleman [disintermediation]. They resemble the business model of “Ebay.” Orders sent through brokers appear within seconds on ECN screen along with all other orders. ECN’s make money by charging a per-share fee). While the traditional securities exchanges are larger than their alternative counterparts, technological progress consistently presents competitive products to the organised exchange fostering innovation. Traditional “Securities Exchanges” take three forms: auction [New York Stock Exchange], dealer or quote driven [NASDAQ, the London Stock Exchange, for example], and order driven [Paris Bourse].
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With the exception of the London Stock Exchange, the European Union lacks critical mass in any stock exchange to take a significant share of the world market. The fact that NASDAQ now owns OMX [NASDAQ OMX] and the NYSE owns EURONEXT further erodes the importance of European owned organised exchanges, and it logically follows, Europe as a significant money centre (A table of twenty “Stock Exchanges” set forth in Appendix “A” showing market value places the discussion of MiFID in a global context). The table demonstrates that the combined value of the NYSE EURONEXT and NASDAQOMX accounts for 59% of the total market capitalisation of companies in the major world markets. By contrast, the LSE represents 0.07% of total market capitalisation. The point of this illustration is not to disparage the EU, but rather to set MiFID in its real context, to evaluate and judge the Directive’s capacity to: (1) stimulate financial market activity, particularly with respect to the retail investor, (2) reflect developments in the markets, and (3) create a unified EU cross-border market in securities.
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