What does the future hold for exchanges asks Jim Gollan, CEO, virt-x
Last week at TradeTech, the annual equity trading conference, there was much debate on the future of stock exchanges. Acquisition activity and regulatory pressures are currently coinciding to create, if not a ‘perfect storm’, at least a cyclone of activity. Those that choose to ignore its approach risk suffering serious damage to their business models when the impact hits. However, those that are flexible enough to take advantage of this situation will benefit from the resulting ‘resetting’ of the exchange landscape.
If we look first at regulation, the major driver of change is the Markets in Financial Instruments Directive (MiFID), a blueprint for open competition between trading venues focused on creating an efficient pan European securities market. It will affect exchanges in the following ways:
- It effectively outlaws concentration rules and therefore poses a serious threat to central limit order books as trading is likely to move away from those exchanges now operating under such rules
- Open competition in the area of trade reporting will force down ticket fees, resulting in a loss of revenue for national exchanges that have, to date, had a near monopoly in this service
- Transparency in both pre- and post-trade equities trading will increase significantly. Expanded scope, fragmentation of sources and increased competition will impact the business models of market data providers.
In addition to MiFID, the EU Commission has announced that it will take action to lower the cost of post-trade services to Europe’s exchanges, which taken as a whole operate to tariffs significantly higher than the equivalent, centralised service in the US. The Commission told the Trade Tech’s Focus Day that it will announce the results of its enquiry into post-trade services soon and its policy position by July. The industry should expect at least action by the Commission to improve access to post-trade services and to stimulate more competition in this arena.
Secondly, there is the extent to which the landscape may change in light of M&A activity between major exchanges, both European and US. As with any good plot line, there are still many twists and turns ahead. Given recent activity it is likely that some consolidation will occur in the near future. Nevertheless I don’t buy into the prediction that Europe will merge into only two exchange blocs. This would reduce competition, and the market has made it clear – for example in statements from Liba and also the French and Italian Bank Association – that exchange users want pluralism of trading venues offering choice and competition. This will create opportunities for specialist, innovative exchanges and other trading venues to compete on a playing field that, post-MiFID, will be far more level.
Based on the current situation, a successful exchange of the future must:
- Be pan-European in focus – by this I mean not simply a group of national exchanges, but an exchange offering trading in a variety of stocks across Europe under a single rule book and on a multi-currency basis
- Offer post-trade services that give users choice and flexibility
- Be customer-centric - the long term needs of the users of exchanges must be at the heart of all decision-making processes, as opposed to being driven by the more short-term desires of shareholders that may or may not be exchange users
- Embrace innovation - in this rapidly developing environment, only those that adapt will succeed.
It will be interesting to see how exchanges evolve to deal with these changes. It may be some time until the storm passes but the resulting trading environment will be transformed. It represents a unique opportunity to reset the landscape.