Prior to last fall, the past several years were exceptional for most financial institutions, and for none more so than the exchanges. These companies—established stock and derivatives exchanges, new entrants such as electronic communications networks and multilateral trading facilities, and the clearinghouses and depositories (where trades are settled and securities held)—have seen their margins, profits, and other performance metrics rise spectacularly. Across the globe, they increased their EBIT¹ margins to 39 percent, from 18 percent, in the years from 2001 to 2006.

The gains of incumbent exchanges are all the more impressive for coming at a time of great uncertainty: a wave of regulatory change has reached its crest in US equities markets and is now gathering force in Europe and other US exchange-traded markets. Regulators have opened the trading, clearing, and settlement markets to competition. In the United States, entrepreneurs, typically competing on lower transaction fees and more flexible technologies and sharing surplus with those who control liquidity, have gained impressive market share in both cash equities and derivatives.

Yet thanks to high trading volumes, exchanges are thriving. Their near-universal business model—a scalable order execution and fulfillment engine filled with as many trades as possible—has been well suited...