The governance of exchanges: members' cooperatives versus outside ownership

Abstract

Many securities exchanges are run as members' cooperatives: they are run on behalf of the people who use the exchange. This form of governance is unusual. Most businesses have outside ownership: the people who own and run the firm are typically not the same people who buy and use the firm's product. That is, contrast to a members' cooperative, ownership is not bundled with the right to consume. We argue that the crucial distinction between a cooperative structure and outside ownership concerns who has residual rights or control over the non-human assets. With outside ownership, control rests with the owners; and since outside owners are typically only interested in maximizing profit, they tend to make inefficient decisions, tailored to the marginal user. By contrast, in a cooperative the members have collective control. Collective decision making is typically inefficient, because in a vote the views of the pivotal voter are not necessarily the same as those of the membership as a whole. Thus both forms of governance, outside ownership and a members' cooperative are inefficient - but for different reasons, and in different ways. In comparing the two ownership structures, we find that outside ownership becomes relatively more efficient than a members' cooperative as: (i) the variation across the membership becomes more skewed; and (ii) the exchange faces more competition. For many exchanges, but these changes have occurred in recent years. However, even if outside ownership is now the superior structure of governance for an exchange, a members' cooperative may not, of its volition, vote in favour of making the change; i.e. they may decide not to sell up. This is because the gainers may be unable to compensate the losers.