INVESTING: Deal-making frenzy sweeps through trading exchanges

More than 200 years ago, people used to gather under the Buttonwood Tree, a big Sycamore on Wall Street, to trade stocks. Those traders have long since passed on, and their piles of cash have been delegated to others. But, oh man, are we talking piles.

Exchanges are the hottest investment right now. They are getting more hype than China. All of this recent spike in speculation has created an almost unacceptable level of risk for investors in exchange stocks, but the explosion of the industry has many positive effects for global free trade.

Four years ago, the Chicago Mercantile Exchange went public and saw its stock advance to the stratosphere. That success brought out other exchanges, such as the International Securities Exchange and the Chicago Board of Trade. NASDAQ went public and the New York Stock Exchange altered its charter and jumped on the bandwagon, too. This culminated in the recent initial public offering of the NYMEX Exchange, which is the largest energy trading outfit in the world. With all this newly printed wampum, you knew it wouldn’t be long before the deals started flying.

Earlier this year, the New York Stock Exchange bought upstart Archipeligo, giving the Big Board the electronic access it had been lacking.

Then the exchange launched a successful bid for Euronext, a large mainland European electronic exchange. Not to be left out, NASDAQ began buying chunks of the London Stock Exchange and has been trying to take the place over since.

The LSE believes the $5.5 billion NASDAQ is offering is too low and is fighting the takeover. The Chicago Merc took out century-old neighbor Chicago Board of Trade (Is nothing sacred?), creating the largest exchange by market value. And several dozen smaller deals have taken place this year that have stirred the pot even more.

NYMEX went public a month ago, and the stock is already sitting 80 percent above its offering price. Prices of the American-based exchanges have gotten way ahead of themselves, and some nasty short-term pullbacks might occur soon.

Globalization is one of the greatest benefits mankind has ever known. The massive growth of exchanges all over the world is freeing up capital to move more efficiently to the areas of highest return. This will help enforce discipline. Competition is making politicians rethink their policies and laws, and it’s encouraging oppressive governments to open their societies.

A few days ago, Thailand tried to impose currency restrictions on foreign investors. Its market fell 15 percent right away. The next day, the finance minister reversed the law, and the market recovered 75 percent of what was lost. These massive exchanges allowed investors to impose proper punishment on the Thai government, but the government also was quickly rewarded for reversing bad policy.