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I found out today via random googling that stock exchanges are themselves actually companies that are traded on their own exchange. For example, the London Stock Exchange.

What will happen if this company's stock goes bankrupt? What will happen to all the securities that are traded in them? Will they all go bust or stuck?

  • Not so hypothetical, the Hong Kong Mercantile Exchange did collapse, and Nasdaq OMX Europe was closed. – MSalters Jul 10 '13 at 20:48
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    @MSalters Good point about HKMex; I added a note about that to my answer. Also, Nasdaq OMX Europe closed one of its European facilities and consolidated its physical services in London. That's not really the same thing as an exchange closing. – John Bensin Jul 11 '13 at 3:06
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A stock exchange is a marketplace where people can bring their goods [shares] to be traded. There are certain rules. Stock Exchange does not own any shares of the companies that are trading in.

The list of who owns with stock is with the registrar of each company. The electronic shares are held by a Financial Institution [Securities Depository]. So even if the exchange itself goes down, you still hold the same shares as you had before it went down. One would now have to find ways to trade these shares ... possibly via other stock exchange.

This leaves the question of inflight transactions, which again would be recorded and available.

Think of it similar to eBay. What happens when eBay goes bankrupt? Nothing much, all the seller still have their goods with them. All the buyers who had purchased good before have it when them ... so the question remains on inflight goods where the buyer has paid the seller and not yet received shipments ...

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    Presumably the stock exchange wouldn't go bankrupt in the middle of a transaction, since bankruptcy isn't a sudden occurrence. – John Bensin Jul 10 '13 at 15:50
  • True. However transactions done on Day 0 are actually settled on Day 1. IE that's when brokers exchange the money or shares. – Dheer Jul 10 '13 at 16:19
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    Right, but I'm assuming the date the exchange was planning to shutdown (if this is what happened) would be known well in advance, and the exchange would disallow orders after a certain date. I think the likelihood of an exchange going belly-up for financial reasons with less than a day's warning is highly unlikely. – John Bensin Jul 10 '13 at 16:26
  • Agree. Quite possible it would be planned. – Dheer Jul 10 '13 at 16:30
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    Also note, there's a difference between a financial bankruptcy, and the cessation of all operations. When airlines filed for bankruptcy, the planes that were aloft at the time didn't suddenly crash. – JTP - Apologise to Monica Jul 10 '13 at 19:47
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Technically, of course. Almost any company can go bankrupt. One small note: a company goes bankrupt, not its stock. Its stock may become worthless in bankruptcy, but a stock disappearing or being delisted doesn't necessarily mean the company went bankrupt. Bankruptcy has implications for a company's debt as well, so it applies to more than just its stock.

I don't know of any historical instances where this has happened, but presumably, the warning signs of bankruptcy would be evident enough that a few things could happen.

  1. Another company, e.g. another exchange, holding firm, etc. could buy out the exchange that's facing financial difficulty, and the companies traded on it would transfer to the new company that's formed. If another exchange bought out the struggling exchange, the shares of the latter could transfer to the former. This is an attractive option because exchanges possess a great deal of infrastructure already in place. Depending on the country, this could face regulatory scrutiny however.

  2. Other firms or governments could bail out the exchange if no one presented a buyout offer. The likelihood of this occurring depends on several factors, e.g. political will, the government(s) in question, etc.

  3. For a smaller exchange, the exchange could close all open positions at a set price. This is exactly what happened with the Hong Kong Mercantile Exchange (HKMex) that MSalters mentioned. When the exchange collapsed in May 2013, it closed all open positions for their price on the Thursday before the shutdown date.
    I don't know if a stock exchange would simply close all open positions at a set price, since equity technically exists in perpetuity regardless of the shutdown of an exchange, while many derivatives have an expiration date. Furthermore, this might not be a feasible option for a large exchange. For example, the Chicago Mercantile Exchange lists thousands of products and manages hundreds of millions of transactions, so closing all open positions could be a significant undertaking.

  4. If none of the above options were available, I presume companies listed on the exchange would actively move to other, more financially stable exchanges. These companies wouldn't simply go bankrupt. Contracts can always be listed on other exchanges as well.

Considering the high level of mergers and acquisitions, both unsuccessful and successful, in the market for exchanges in recent years, I would assume that option 1 would be the most likely (see the NYSE Euronext/Deutsche Börse merger talks and the NYSE Euronext/ICE merger that's currently in progress), but for smaller exchanges, there is the recent historical precedent of the HKMex that speaks to #3.

Also, the above answer really only applies to publicly traded stock exchanges, and not all stock exchanges are publicly-held entities. For example, the Shanghai Stock Exchange is a quasi-governmental organization, so I presume option 2 would apply because it already receives government backing. Its bankruptcy would mean something occurred for the government to withdraw its backing or that it became public, and a discussion of those events occurring in the future is pure speculation.

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  • Looking at recent bank bailouts, "regulatory scrutiny" is not likely. In fact, the regulatory body may be actively involved in the bailout precisely to avoid option #2. – MSalters Jul 10 '13 at 20:21
  • @MSalters I included regulatory scrutiny in point 1, not the point that referred to bailouts. In recent years there has been regulatory scrutiny of exchange mergers (see the link I posted about the derailed merger between NYSE Euronext and Deutsche Börse). Regulatory scrutiny is a completely different ballgame during bailouts, which is why I didn't include it in that point (although in some form, it might fall under the "etc.") – John Bensin Jul 10 '13 at 20:31
  • +1 - "One small note: a company goes bankrupt, not its stock" - good point, I was about to comment about that. – Victor Jul 10 '13 at 21:54

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