Changing times for exchanges

Lackluster trading volumes in equity markets have not only hurt revenue of trading firms, but also have impacted revenue for stock exchanges. Equity trading revenue has traditionally been the main source of income for the exchanges, but exchanges worldwide have been looking to diversify their revenue base for some time now to reduce reliance on a single revenue source. Falling volumes in recent times have been a catalyst for exchanges in upping their games in this regard. A few recent initiatives by leading exchanges indicate that this trend is well underway. Technology provides many developed market exchanges a solid opportunity for growth. Many of the world’s emerging markets are still at a very early stage of development, particularly regarding adoption of electronic trading tools and technologies. The adoption of electronic trading in the emerging world started just before 2008 but was somewhat set back due to the crisis; it is growing again. Some of these emerging market exchanges lack the wherewithal to develop required systems and technologies to support growing electronic trading volumes. The developed exchanges like NYSE, NASDAQ, Deutsche Borse, CME and their technology arms have been active in helping these exchanges in upgrading and modernizing their systems. At a time of stagnating trading volume and revenue, this provides the developed exchanges additional revenue stream. The developing exchanges gain superior technology, and at times the scope for easier integration with the developed market exchanges through such partnerships. Many examples can be found supporting this trend but it is not just an emerging exchange phenomenon as the recent news of NASDAQ providing a new trading platform for Japan’s biggest derivative exchange group suggests. Another noteworthy trend has been exchanges looking for horizontal and vertical integration opportunities. In the wake of new regulations mandating central clearing of standardized derivative contracts, some exchanges, such as the Hong Kong Exchange, are looking to grow vertically by adding clearing capabilities. Furthermore, exchanges and exchange groups are also looking to expand geographically to seize new opportunities created by evolving regulations. Exchanges are also looking to add capabilities supporting newer products and asset classes moving beyond just equities. Recent examples of the Swiss exchange launching a bond trading platform, or BATS exchange moving into the FX space are indicative of this trend. The growing adoption of electronic trading in these asset classes is helping in creating exchange type centralized trading venues moving away from traditional bilateral or OTC model. In addition, cross listing of products is another strategy that is being tried by some exchanges. Along with product and technology, exchanges are also looking to capitalize on their data business. Recent acquisition of Russell Investments by the London Stock Exchange highlights this trend; other exchanges are likely to take this route to attract new revenue stream. One driver behind this would be to penetrate and gain foothold among buy-side players. Exchanges traditionally have focused solely on the sell side, and buy side presents a vast untapped potential for them. All in all, busy time for the exchanges!