The governance of exchanges: members' cooperatives versus outside ownership

Many securities exchanges are run as members' cooperatives:they are run on behalf of the people who use the exchange. Thisform of governance is unusual. Most businesses have outsideownership: the people who own and run the firm are typicallynot the same people who buy and use the firm's product. Thatis, contrast to a members' cooperative, ownership is not bundledwith the right to consume. We argue that the crucial distinctionbetween a cooperative structure and outside ownership concernswho has residual rights or control over the non-human assets.With outside ownership, control rests with the owners; and sinceoutside owners are typically only interested in maximizing profit,they tend to make inefficient decisions, tailored to the marginaluser. By contrast, in a cooperative the members have collectivecontrol. Collective decision making is typically inefficient,because in a vote the views of the pivotal voter are not necessarilythe same as those of the membership as a whole. Thus both formsof governance, outside ownership and a members' cooperativeare inefficient - but for different reasons, and in differentways. In comparing the two ownership structures, we find thatoutside ownership becomes relatively more efficient than a members'cooperative as: (i) the variation across the membership becomesmore skewed; and (ii) the exchange faces more competition. Formany exchanges, but these changes have occurred in recent years.However, even if outside ownership is now the superior structureof governance for an exchange, a members' cooperative may not,of its volition, vote in favour of making the change; i.e. theymay decide not to sell up. This is because the gainers may beunable to compensate the losers.