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Note: This article is adapted from a speech Wolkoff gave to the Ocean Tomo Fall 2006 Intellectual Property Auction Gala, October 25, 2006. The exchange industry is undergoing dramatic changes. New innovations and new technologies are entering the market today that will change the shape of the industry for years to come. Amidst this backdrop, intellectual property (IP) rights are playing, and will continue to play, an important role in determining who will most benefit from the dramatic changes that are coming. In the past few years, we have seen an impressive library of innovations coupled with IP protections, and we have seen some ideas that are dressed up as innovations trying to seek the cover of the same IP protections. The evolving exchange landscape can serve as a model for what is happening in countless other industries, as technological advances drive increased competition at an ever-accelerating pace. For most of its history, the American Stock Exchange, or Amex, operated in a relatively safe business environment. One of only three national securities exchanges, we were the home for smaller and midsize companies, and nearly all trading in our listed companies occurred on our trading floor. In the early 1970s, we added listed options to our business, and in 1993, we launched trading in the Standard and Poor's Depository Receipts 1, or SPDRs (AMEX: SPY), the world's first exchange-traded fund (ETF). Like most industries, the exchange world has changed dramatically over the years. The rise of the Nasdaq Stock Market as a listing venue not just for risky start-ups, but also for established mid- and large-sized companies, has intensified competition for primary stock listings. The development of alternative trading systems (ATS) and electronic communication networks (ECNs) has fomented intense competition for market share in the trading of listed securities across all markets. Unlisted Trading Privileges allow listing venues, ATS and ECNs to trade almost all of each others' listings. Like everywhere else in the world, the pace of change is accelerating; exchanges and ECNs are demutualizing, turning into public corporations accountable to shareholders, and merging or forming alliances at a dizzying pace, both domestically and internationally. The Chicago Mercantile Exchange recently bought the Chicago Board of Trade for $8 billion. That truly is an astounding number. The combined entity will be the largest derivatives market in the world, worth some $25 billion. These combinations are being driven by the relentless commoditization of the exchanges' core transactions business. Because of the competition across marketplaces for trading in the same listings, the amount an exchange is able to charge for a transaction today is a tiny fraction of what it was a few years ago. In response, exchanges are looking to build scale through mergers, which not only increase the number of transactions an exchange can handle in its existing business, but also add new types of instruments to trade; recently, a number of mergers have been driven by the desire for exchanges to expand into derivatives contracts like options and futures. In today's hypercompetitive environment, exchanges have to create new strategies to survive by differentiating themselves, and find new ways to protect and extract value from their innovations. As we look to the future, we think there will be significantly greater emphasis on protection of IP rights around innovation. These efforts will fall into three broad categories: technology, information and product offerings. Each of these areas has had, and will continue to have, its own issues with respect to IP rights.
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