Demutualization: Introduction, influence and the predicted ownership structure for the Tel Aviv Stock Exchange

The focus of this research is the change in the legal ownership structure of stock exchanges from a mutual or cooperative not-for profit-ownership model to a for-profit, joint-stock company. This phenomenon, referred to as demutualization, is designed to, among other things, modernize trading platformsand has occurred on stock exchanges worldwide. The structure of ownership of stock exchanges has a major impact on many aspects of an exchanges’ operation: from incentives, risk management, operational efficiency and corporate governance to technology and cooperation. This ownership change from a mutual association to what is in most cases a joint-stock company can prove to be of importance to capital market performance of the exchange. Demutualization of the Tel Aviv Stock Exchange (TASE) was the first recommendation of Ben-Chorin Commission (2013), in order to enhance the liquidity, efficiency and performance of Israel’s capital market. In 2014, following the Commission, a bill calling for the demutualization of the TASE was presented in the Knesset.

While the literature on demutualization is diverse, earlier comparative research has shown that many indicators of market performance improved oftentimes in terms of domestic market capitalization, capital raised by domestic companies, total value of share trading, turnover velocity and efficiency. Given that, this research addresses three main questions that come up in the context of the demutualization of the TASE: (1) what exactly is demutualization, and why did the phenomenon begin to appear globally during the last decade of the 20th century? (2) What can we learn from the global experience of demutualization? (3) What is the predicted ownership model for the TASE in light of Israel’s local market composition?

The main findings are:

  • Overwhelmingly, the regulatory agencies that oversaw these stock exchanges defined the demutualization process as a success.
  • Institutional investors and foreign exchanges largely replaced the brokers and banks that previously owned the stock exchanges prior to demutualization.
  • Israel is the only country not to have demutualized when it’s market structure and macroeconomic conditions clearly would have predicted it.
Nathan Hemmendinger
Nathan interned with the Head of the Israel Securities Authority. Prior to joining the Milken Fellows Program,  Hemmendinger worked as a research assistant for Professor Ben-Bassat at the Hebrew University, and for the Committee for Increasing Competition at The Banking...
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