The demutualization of a stock exchange refers to the process by which a member-owned exchange is reorganized as a shareholder-owned exchange, thereby switching from private to public ownership.
Drawback to Member-Owned Exchange
Because a member-owned stock exchange is managed by the same groups that it must potentially discipline, an implicit conflict of interest is built into its structure.
Benefits of Demutualization
A demutualized stock exchange doesn’t face the same conflict of interest that a member-owned stock exchange faces. Also, as more exchanges demutualise, the heightened competition drives exchanges to improve technologies and fee structures. Another benefit is that by going public, an exchange has access to more capital and the ability to expand into new markets.
Toronto, Canada’s stock exchange was the first North American exchange to demutualize; that took place in 2002. As of 2010, most of the world’s largest exchanges have demutualized, including the New York Stock Exchange (NYSE) Euronext, which covers markets in the United States, the United Kingdom and continental Europe.