Liquidnet’s Seth Merrin shares how exchanges can develop a global strategy to compete today.
Following a year of failed crossborder mergers, exchanges are at a crossroads. They have worked in siloes within their respective countries but now have to create their global strategies. To move forward, there are lessons for the exchanges to learn from another industry that followed a very similar trajectory more than a decade ago—the airline industry.
Airlines share many parallels with exchanges—a strong nationalistic sentiment, a highly competitive environment driven by the entrance of low cost carriers, and a record of unsuccessful M&A activity. So what steps did the winners in the airline industry take in order to beat out the low cost competition, how did they achieve global scale and what can exchanges learn from this?
Airlines tackled the fundamental evolution of their industry by focusing on three key areas: diversification of revenue by selling more to their existing client base, differentiation of their offering by focusing on a premium customer, and development of global alliances to expand their geographic reach.
Let’s first take a look at revenue diversification and how exchanges can take a similar approach. Airlines realised they had a captive audience with their customers and once they had these customers in their seats, they could sell them more products. As a result, the airlines introduced paid-for services in coach and new premium products and services to all customers. Who hasn’t been on an aeroplane and paid for food, extra space, or, picked up an ever-expanding catalogue of duty free items?
Historically, exchanges have had two primary streams of revenue: company listings and trading. Today, these revenue streams constitute only a minor component of total revenue as exchanges have placed more emphasis on their ‘premium offerings’. The NYSE Euronext and Nasdaq, both of which have faced significant competition sooner than many of their peers, recognised that they had a captive audience in their listed companies and expanded their offering by selling premium services such as new technology offerings and premium data products and services. Today, both of these exchanges have multiple revenue streams and no single business comprises more than 20% of their overall revenue. What they have left to do—and what virtually no other exchange has done—is to develop a premium class of customer.
The entrance of low-cost providers, such as EasyJet and Ryanair, in the airline industry commoditised the price of an airline seat. As a consequence, airlines (particularly the established players) could no longer compete on price alone and needed to diversify their offering. So they went upscale, choosing instead to focus on high margins and higher value offerings, which their discount counterparts couldn’t match. While discount carriers charged for pillows, winning airlines created a premium offering and experience for their business and first class travellers. It’s not surprising that these premium passengers were willing to pay significantly more for steak, champagne, and lieflat beds because of the ultimate experience these airlines provided.
Infosys Consulting’s Mahendra Hingmire and Parthiv Mehta explain how FIX 5.0 can improve automation, reduce costs and increase revenue through greater efficiency.
Early FIX solutions
The FIX Protocol has evolved from supporting equities to supporting messaging requirements of multiple asset classes, including derivatives,fixed income and foreign exchange.
The explosive growth of use of FIX, facilitated by the flexibility it presents, the parallel growth and use of proprietary application programming interfaces (APIs) by the exchanges, met the industry’s immediate needs for business growth. At the same time, the earlier versions necessitated certain costs on maintenance, interconnectivity and language translators.
The flexibility to create custom tags, met the needs of individual firms, however, this practice can also lead to the generation of non-standard versions of the protocol and its widespread use can result in higher costs of implementation and a longer time for deployment for the industry. Also, the tight coupling of the application layer and the business layer in FIX4.X versions limited the ability to adapt to newer functionalities offered by later FIX versions.
Demand of the Industry and FIX 5.0
The industry as a whole needed to address the limitations of the existing protocol as well as find a protocol flexible enough to support their future requirements. FPL came together to address the dual needs of its members and the outcome was FIX 5.0 and FIXT.1.1, the FIX Session Protocol, as an answer to its members’ requirements.
Transport independence disconnected business messages from their carrier thereby allowing different versions of FIX Protocols to be run on the same session via any appropriate technology, in addition to the FIX Session Protocol. This feature helped reduce technological constraints and made it possible for firms to communicate with each other regardless of their FIX version. This is possible because FIX 5.0 runs on top of the FIX Session Protocol. Transport independence serves the industry’s need to use the existing FIX versions and also help firms reduce the future cost of implementing new FIX versions.
Ian Salmon, Head of Enterprise Business Development EMEA for Fidessa reviews the dynamics of trading in the MENA region including DMA access and drivers of future growth.
The Middle East North Africa (MENA) markets appear set to embark on a recovery led by the attraction of investment within and into the region. We’re seeing demand for electronic access to these markets from both our existing western tier 1 customers, who are looking to offer their services in the region, and from local brokerages and banks looking to offer both DMA and retail access to the markets in a way that is safe and reliable. For now, at least, the services required by brokers in this region are order management, the ability to handle FIX flow and straight through processing (STP) with risk and portfolio management.
Two important factors come into play. First, electronic services accessible to market participants from outside the region require reliable communications and the adoption of FIX, together with risk and order management platforms locally to ensure secure and performant access. Obviously, there are a number of networks operating, and they all expect to receive orders via FIX. This is prompting the exchanges and their members to seek reliable pan-MENA communications and complimentary support services. Second, in order to service the needs of the local investment community, which is predominantly retail in nature, competent web-portal and risk capabilities are needed to facilitate pan-regional market access. This forms the backbone of the type of reliable web portals launched by NCB Capital, for example, which can feed into an OMS capable of supporting their 1.2 million retail customers and 250,000 concurrent users.
There are three main models for order flow in the MENA region. First, there is inbound traffic coming from large international firms employing strategies that take account of local trading restrictions. The local brokers are aware of this and are looking to offer FIX-based solutions for inbound order flow as well. The second is intra-regional order flow, where brokers within the Gulf Coast countries utilize their relationships to route orders between themselves and between their memberships. Finally, the third is outbound order flow, which is based on the attraction of ownership of foreign bonds and equities to local players, with local brokers going outside the region to trade these instruments.